Question

(a) Using appropriate diagrams compare and contrast short-run equilibrium conditions with the
long-run equilibrium condition faced by a firm under monopolistic competition. 10
(b) A perfect competitive industry faces a demand curve represented by Q = 10,000 – 10P. Also
suppose that an individual firm belonging to that industry faces a marginal cost function given
by
MC (Q) = 4Q + 100
Here Q represents quantity of output produced and P is the price. What would be the
equilibrium market price? How much does each firm produce in equilibrium? and also find
how many firms would be there in the industry in the long run?

Answer 1

Explanation:

• The difference between the short‐run and the long‐run in a monopolistically competitive market is that in the long‐run new firms can enter the markCalculate number of firms. Given the market quantity, and the individual firm's quantity produced we can calculate the number of firms: nq*=Q* Total output is Q*=10 000 and each firm produces q*=50 units, so there must be n=10 000 / 50=200 firms.et, which is especially likely if firms are earning positive economic profits in the short‐run. NewIn perfect competition, why is a firm's marginal revenue curve also the demand curve for the firm's output?
• A perfectly competitive firm's demand curve is a horizontal line at the market price. This result means that the price it receives is the same for every unit sold. firms will be attracted to these profit opportunities and will choose to enter the market in the long‐run. In contrast to a monopolistic market, no barriers to entry exist in a monopolistically competitive market; hence, it is quite easy for new firms to enter the market in the long‐run.