Question

QUESTION 14 Outline the main assumptions of monopolistic competition. Explain, with the graphs, the short run and long run equilibrium conditions of a monopolistic competitive firm (10 marks) QUESTION 15 At what price and output will a monopolist firm maximise profits and how much profit will it make? Explain with graph (10 marks) (10 marks) QUESTION 16 What conditions must hold for price discrimination to be possible? In each of the cases below, why and how does a firm choose to separate its customers into two markets? a) A hotel in the city centre offers weekend room discounts. b) Private Doctors charge their lower income patients less than their rich patients for plastic surgery

Answer 1

14)Monopolistic competition is a type of imperfect competition where producers sell differentiated product which are not perfect substitutes.Main assumptions of monopolistic competition are -large number of buyers and sellers , the products are differentiated but close substitutes,they are free entry and exit of firms ,the objective of the firm is profit maximisation in short and long run,the demand and cost curves of all products are uniform in the group.

In the short run the monopolistic firm maximises its profit by producing output where MR =MC.The firm takes the price based on its AR curve.By finding the difference between AR and AC and then multiplying by the amount sold , helps to get the total profit of the firm.

In the long run ,the firm produces upto that level where MR =MC. In the long run other firms entered the market and the AR curve shifted and there has been increase in competition.The firm does not sell its goods above average cost and there is no economic profit.

LANG ALle AC AC AR MR MR X