Microeconomics: monopoly - Essay Example

1) A monopolistic competitive industry is one in which there are many producers selling product in a same genus but these products are differentiatedon the basis of advertising, quality, ingredients and other differentiating factors such as brand name, type of service etc. A firm located in this industry faces a more elastic curve than a monopoly because if producers try to charge higher prices to consumers, they can turn to other producers, a luxury which is not available in a monopoly. As a result, the resulting curve is more elastic than a monopoly indicating that this kind of firm cannot just charge any price, like a firm having a monopoly power.

Similarly, the curve is less elastic than purely competitive firms, because unlike pure competition the firms located in monopolistic competitive industry differentiate their products on the basis of various factors discussed above. This means that other firms are producing close substitutes for a product but not perfect substitutes. As a result of which, a firm has some degree of power of what price it charges to its consumers and hence the demand curve is less elastic than a purely competitive firm.2) Revenue = 4.

5 * 50 = $225Total Costs = 5 * 50 = $250Loss = R - C = 225 -250 = ($25)Classification of costs:Variable Costs = 4 * 50 = $200Fixed Costs = 250 - 200 = $50The firm is producing the right amount of output at a point where its MC = MR. Although, firm is making a loss, it should continue to produce as it covering it's average variables and some part of fixed costs. At least, in the short-run it should continue to produce the same amount of output because if it ceases to produce, the loss will rise-up to $50, which is greater than the loss it is bearing at the moment.

Therefore, a rational decision would be to continue to produce as long as firm is covering its average variable costs.3) PriceQuantity demandedTotal revenueMarginal revenue per unit$5.80 50 $ 2505.60 100 560$ 3105.40 150 810 2505.20 200 1040 230 5.00 250 1250 2104.80 264 1267,2 17.24.60 279 1283.4 16.24.40 288 1267,2 -16.24.20 300 1260 -7.2a) The kink is at the point $4.8, where the quantity demanded is 264 units.b) The range of marginal cost that will keep the prices at kink will be from $4.8 to $4.6