Monopolistic Competition
- The figure below displays the demand and cost curves facing a monopolist.
- What is the profit-maximizing/loss minimizing output level?
The profit-maximizing/loss-minimizing output level is the point at which marginal revenue equals marginal cost. For the firm, it is 630 units.
- calculate the amount of profit/loss for the firm
The amount of loss = ($ 75 – $ 68) * 630 = $ 4,410.00
- Suppose that, at the profit-maximizing/loss-minimizing output level, the average variable costs are $70. Will this change your answer from part a? Provide a 1-2 sentence explanation.
Average variable costs of $70 will change the profit-maximizing/loss-minimizing output level. An increase or decrease in the average variable costs directly shifts marginal cost, since the fixed prices do not vary. Thus, changing it results in moving the profit-maximizing/loss-minimizing output level.
- Suppose that the firm is currently producing 850 units and is contemplating whether or not they should increase production to 900 units. Will total revenue increase, decrease or stay the same. Provide a 1-2 sentence explanation.
The total revenue will decrease. If the firm produce 900 units, the prices at which they sell, suppose it is approximately $45, will decline from the amount of selling 850 units, an approximate of $50. The increase in production units will result in decreased total revenue from the formula of calculating total revenue (Price x Quantity Produced) (Investopedia, 2019).
- John Beckwith and Jeremy Grey are venture capitalists that have invested in a company, Holy Shirts and Pants. You are tasked with completing the table and determining the profit-maximizing level of output for the firm. (you can copy the table into excel, do it, then paste back)
| Quantity Sold | Price ($) | Total revenue ($) | Marginal revenue ($) | Total Cost ($) | Marginal cost ($) | Profit ($) |
| 0 | 10 | 0 | —– | 200 | —– | -200 |
| 100 | 9 | 900 | 900 | 800 | 600 | 100 |
| 200 | 8 | 1600 | 700 | 1300 | 500 | 300 |
| 300 | 7 | 2100 | 500 | 1700 | 400 | 400 |
| 400 | 6 | 2400 | 300 | 2000 | 300 | 400 |
| 500 | 5 | 2500 | 100 | 2200 | 200 | 300 |
| 600 | 4 | 2400 | -100 | 2600 | 400 | -200 |
The marginal revenue and cost for Holy Shirts and Pants are equal when the quantity of units sold is 400. Therefore, the profit-maximizing level for the firm is 400 units.
- Suppose you are in the market for a used treadmill and find a Nordic Track Commercial 2150 on sale for $1000. If you knew the motor was in good condition, you would be willing to pay $1,400. Meanwhile, if you knew the motor was only in fair condition, you would only be willing to pay $400 for the treadmill. Explain the circumstances under which you would be ready to purchase the treadmill for $900.
The used treadmill is on sale for $1000, implying that there are various treadmills of different quality. The customer would be willing to pay $900 if its condition looks good and does not have sufficient knowledge about it.
- Please supply an example of a health-related firm that operates in a monopolistically competitive market. Then, provide a 4-5 sentence explanation in support of your choice.
The health insurance company is an example of a health-related firm operating in a monopolistically competitive market. The reason being, it is the only firm that insures a person against health menace. Thus, the company can make unconventional decisions towards their policies and amounts of premiums they charge. (Economics Online, 2020) The firm also has an outstanding role in the market by making affordable healthcare cost for the people—additionally, high differentiation of the service that a health insurance company provides from any other service.
References
Economics Online. (2020, February 09). Monopolistic competition. Retrieved July 02, 2020, from https://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html
Investopedia. (2019, May 01). What Is the Relationship Between Marginal Revenue and Total Revenue? Retrieved July 02, 2020, from https://www.investopedia.com/ask/answers/033115/what-relationship-between-marginal-revenue-and-total-revenue.asp