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

248 PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY [CHAP. 10
(b)
At the best level of output of 8 units, the firm incurs a total loss of $16 per time period. However, since
P . AVC, the firm minimizes its total losses by continuing to produce in the short run. Specifically, if the
firm stopped producing it would incur a total loss of $32 (equal to the $4 average fixed cost at Q ¼ 8 units
times the output of 8 units) as compared to a total loss of $16 by continuing to produce.
10.4 (a) What are the choice-related variables for a firm under monopolistic competition? (b) What is
nonprice competition? (c) Product variation? (d) What are selling expenses?
(a) The choice-related variables for a monopolistically competitive firm are price, product variation, and selling
expenses. That is, in order to maximize short-run profits, the firm can charge the price at which MR ¼ MC.
The firm can also undertake product variation and increase selling expenses until the MR from these efforts
equals the MC. This is to be contrasted to the case under perfect competition where the firm only determines
the best level of output to produce.
(b) Nonprice competition refers to all the efforts on the part of firms to increase sales or make the demand curves
that they face less elastic through product variation and selling expenses.
(c) Product variation refers to changes in some of the characteristics of the product in order to make it more
appealing to consumers. For example, beer makers have put on the market light beer for weight-conscious
consumers and have introduced plastic bottles because they are lighter and unbreakable.
(d ) Selling expenses are all those expenses that the firm incurs to advertise its product, to increase its sales force,
to provide more and better servicing of the product, and to otherwise induce consumers to purchase the
product.
10.5 Explain how the monopolistically competitive firm of Fig. 10-9 might reach the long-run equilibrium
position shown in Fig. 10-11.
Fig. 10-11
Since the monopolistically competitive firm of Fig. 10-9 earns a profit in the short run, more firms enter the
market in the long run. This causes the demand curve of the firm to shift down to d 0 in Fig. 10-11 (as this firm’s
market share declines), so as to be tangent to LAC curve at the output level of 6 units, at which MR 0 ¼ LMC
(point E 0 ). At Q ¼ 6, P ¼ LAC ¼ SAC ¼ $6 (point A") and the firm breaks even in the long run. Note that
since the firm is in long-run equilibrium, it is also in short-run equilibrium (i.e., at Q ¼ 6, MR 0 ¼ SMC 0 ).
10.6 Discuss the long-run efficiency implications of monopolistic competition with respect to (a) utilization
of plant, (b) allocation of resources, and (c) advertising and product differentiation.
(a)
When a monopolistically competitive market is in long-run equilibrium, the demand curve facing each firm is
tangent to its LAC curve (so that each firm breaks even). Since the demand curve is negatively sloped, the
tangency point will always occur to the left of the lowest point on the firm’s LAC curve (see Fig. 10-1).
Thus, the firm underutilizes a smaller-than-optimum scale of plant when in long-run equilibrium. This
allows the existence of more firms in the industry than otherwise (see Problem 10.7). An example of this is
the “overcrowding” of gasoline stations, barber shops, grocery stores, etc., with each business idle much of
the time.