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Scenario: Monopolistically Competitive Firm
For a monopolistically competitive firm, Q = 160 - P; MC = 20 + 2Q; and TC = 20Q + Q 2 + 20.
-(Scenario: Monopolistically Competitive Firm) Given the information in the scenario Monopolistically Competitive Firm, in the short run, this firm:
A) earns profits of $2,430.
B) incurs losses of $2,450.
C) earns no profit.
D) incurs losses of $20.

Question

Quizplus · Accepted Answer

In the short run, the firm earns profits of $2,430. This is because the firm's total revenue is greater than its total cost. The firm's total revenue is equal to P * Q, which is (160 - P) * Q = 160Q - PQ. The firm's total cost is equal to TC, which is 20Q + 20. The firm's profit is equal to total revenue minus total cost, which is (160Q - PQ) - (20Q + 20) = 140Q - PQ - 20. To find the profit-maximizing quantity, we set marginal revenue equal to marginal cost. Marginal revenue is equal to the change in total revenue divided by the change in quantity, which is d(TR)/dQ = 160 - 2P. Marginal cost is equal to the change in total cost divided by the change in quantity, which is d(TC)/dQ = 20 + 2. Setting marginal revenue equal to marginal cost, we get 160 - 2P = 20 + 2, which gives us P = 70. Substituting P = 70 into the demand curve, we get Q = 160 - P = 160 - 70 = 90. Substituting Q = 90 into the profit equation, we get profit = 140Q - PQ - 20 = 140(90) - 70(90) - 20 = $2,430.

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