Chapter 1. Chapter 10b

Step 1

Solved Problems

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You must read each slide, and complete any questions on the slide, in sequence.

Question

The following curves are for a monopolistically competitive firm. The marginal cost (MC) curve, marginal revenue (MR₁) curve, and demand (D₁) curve corresponding to each level of output (Q) and price (P) are shown in the graph below.

The graph shows ‘Quantity’ on the horizontal axis, and ‘Price’ on the vertical axis. The marginal revenue curve, MR1, and the demand curve D1 are two downward sloping lines on the graph originating from the same point on the vertical axis. The graph also shows the marginal cost curve MC, an upward sloping line that intersects the MR1 curve at point L. An ATC curve intersecting the MC and the D1 curve is also shown. Two points are indicated on the vertical axis, J, and H. Point H is one unit over point J. Other points indicated on the graph include: Point M on the horizontal axis Point L, which is two units above point M, and is the intersection of the MC and MR1 curves. Point K on the ATC curve, two units above point L. Point I on the D1 curve, one unit above point K

In the short run, the firm follows the formula JCXBAYR84xIj31ea5M/XAKU/9rd4ZQNiv4gC+LRcIoexM6k8WL8LIcEGAe6ZpO82dpjOVpFnBcB4XDzx and it 1x1GEHSmQB7Xf9RkNYh/Nw== earn a profit.

In the short run, monopolistically competitive firms behave like monopolists. They follow the monopolist’s pricing decision and can earn profits before competition enters.

Step 2

Question

Revenue is represented by the rectangle ghPWmda0isxjYtoimUR/2sTTNeOekbMSlh9HAXQ1CUt1h4kgNaND4v8BKPgeDsXB.

Revenue equals P x Q. If MR = MC at point L, the corresponding price is I and Quantity is at point M. The rectangle represented by this has a base of OH and a height of IM, so the rectangle is bounded by HIMO.

Step 3

Question

Total costs are represented by the rectangle tGayuPL6YcQwZsgbj41YBjQ3gXI10WP1FZfAnj/4u3sshg5uMrWLwkzIqPVWLPIc.

Since ATC = Total Cost / Quantity, then TC = ATC x Q. Costs are therefore the area below the ATC curve where MR = MC. This is point K. M, O, and J are the other corners.

Step 4

Question

Profit is represented by the rectangle DXaecX3ezBaUnESwLb6Kuo1nZCSuAjZybikDICa0Xr8wDHsYX9DTfJgoRzOnQStw.

Profit is the difference between revenue and costs. The part of the revenue rectangle that exceeds total costs is bounded by HIKJ.

Step 5

Question

The graph shows ‘Quantity’ on the horizontal axis, and ‘Price’ on the vertical axis. The marginal revenue curve, MR2, and the demand curve D2 are two downward sloping lines on the graph originating from the same point on the vertical axis. The graph also shows the marginal cost curve MC, an upward sloping line that intersects the MR2 curve at point T. An ATC curve touching the D2 curve at point S and intersecting the MC curve is also shown. Point S corresponds to three units of the horizontal axis and five units of the vertical axis. Two points are indicated on the vertical axis, N, and R. Point N is at two units above the intersection of the horizontal and vertical axis. Point R is three units over point N. Other points indicated on the graph include: Point M on the horizontal axis, Point T, at the intersection of the MC and MR2 curves. This point corresponds to three units of the horizontal axis and two units on the vertical axis. Point K on the D2 curve, which corresponds to five units of the horizontal axis and three units on the vertical axis.

In the long run, the price per unit of output for the firm equals c78ZwuphvsdR1Qqp and it 98RZuska2DoKNkUANZwGUQ== earn a profit.

In the long run, new firms enter until each firm operates at zero profit. This reduces demand for the individual firm. These firms must operate at P = ATC; if price falls below ATC, they will lose money.

Step 6

Question

Profit is vgCpHxdCREsWojmFkRjDdrmvbPSHg99kT0/wb6qCClDs5tsFsVbf9IJ95lc5nKcyMEQzBQ==.

Profit is eliminated by the entrance of new firms.