Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 10] PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY 247
(c)
monopolistic element results because the many firms in the market sell a differentiated rather than a homogeneous
product.
Since, under monopolistic competition, each firm produces a somewhat different product, we cannot define the
market demand curve and the market supply curve of the product, and we do not have a single equilibrium
price but rather a cluster of prices, each for the different product produced by each firm. Thus, the graphical
analysis of monopolistic competition must be confined to the typical or representative firm.
SHORT-RUN EQUILIBRIUM UNDER MONOPOLISTIC COMPETITION
10.2 (a) Draw a figure for a monopolistically competitive firm which faces a demand curve showing Q ¼ 0at
P ¼ $12 and Q ¼ 8atP ¼ $8, a SMC curve which intersects the MR curve at Q ¼ 8, and for which
SAC ¼ $6 at Q ¼ 8. (b) What is the best level of output for this firm? How much profit or loss per
unit and in total would this firm make or incur?
(a)
Fig. 10-9
(b)
In Fig. 10-9, d is the highly price-elastic demand curve faced by the monopolistically competitive firm and MR
is the corresponding MR curve. The best level of output of the firm in the short run is 8 units and is given by
point E, at which MR ¼ SMC. At Q ¼ 8, P ¼ $8 (point A on the demand curve), and SAC ¼ $6 (point B), so
that the firm maximizes profits at AB ¼ $2 per unit and ABCF ¼ $16 in total.
10.3 (a) On the demand and marginal revenue curves in Fig. 10-9, draw an alternative ATC curve showing
that at the best level of output of 8 units, the monopolistically competitive firm incurs a loss of $2 per
unit, but P . AVC by $2. (b) What is the total profit or loss of the firm at the best level of output? Will
the firm produce or not? Why?
(a) See Fig. 10-10.
Fig. 10-10