Table 16-1
A monopolistically competitive firm faces the following demand curve for its product:

-Refer to Table 16-1.The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit.What will the firm do

Question

Table 16-1
A monopolistically competitive firm faces the following demand curve for its product:
 
-Refer to Table 16-1.The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit.What will the firm do

Quizplus · Accepted Answer

To maximize profits, the firm will produce the quantity where MR=MC. Looking at the table, at a quantity of 6 units, MR=$24 and MC=$5, which means that producing 6 units will maximize profits for the firm.

In the long run, the market will adjust and firms will enter or exit until only normal profits are earned. In a monopolistically competitive market, firms have some ability to differentiate their products, so there may be some degree of market power. However, if profits are consistently high in the long run, new firms will enter the market and increase competition, driving prices down and reducing profits for all firms. Therefore, it is likely that some firms will exit the market in the long run, but it is impossible to say exactly how many.

Table 16-1 a Monopolistically Competitive Firm Faces the Following Demand Curve for Curve