Question

Question 2: Monopolistic and Oligopoly firms 0 Question 1 Use the graph below to explain the output, profit and loss conditions for monopolistically competitive firms. Show your work where appropriate in reference to the Graph. Firm Lan T-shirt monopolistic competitive firm Price MO 25 ATG 25 ATE 20 15 ED 10 5 MR 30 10 20 30 90 Supply with example exam the baton business entry for imperfect competition

Answer 1

answer: a: the profit maximizing condition for a firm is : MC = MR . the point where marginal cost is equal to the marginal revenue of the firm and marginal cost curve intersect marginal revenue curve from below.

We will draw a vertical line though the intersection point of MC and MR till the ATC curve . the point where this vertical line intersect the DD curve/average revenue curve or price line is the price or average revenue of the firm.

In the given graph at the profit maximizing condition the output is – 40 units

Price of the firm is = 20

Profit or loss of a firm is shown by the area between price/average revenue and ATC (average cost)

Profit or loss per unit = average revenue – average cost

Average revenue is = 20

Average cost = 22.5

Profit or loss = 20 - 22.5

Loss = - 2.5

Here the average cost is greater than the average revenue so firm is facing loss

Total Profit or loss = total revenue – total cost

or loss per unit * unit of production

total loss = 2.5 * 40 = 100

answer: b: imperfect competition means when firm does not fulfill any of the features of perfect competition example large number of firms in the market, producing homogenous goods, no barrier to entry and exit and no price competition between the firms etc. if firm violates any of the characteristics it is termed as imperfect market. Monopoly, oligopoly, monopolistic market and duopoly are the imperfect markets.

The firms under imperfect market competition faces entry to barriers in the market due to various reasons such as control over raw materials, economies of scale, technological advantage, market share, predatory pricing etc. these reasons give superiority to one firm over another due to which firms either does not enter in the market or they are not able to compete with other firms after entering the market.

Example a firms with economies of scale means low cost with maximum production will set its prices low which will make difficult for other firms to compete at that low price