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# Monopolistic Competition

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1. Monopolistic Competition
Exhibit 2 shows the short-run demand and cost conditions for a firm under Monopolistic Competition. Replicate the graph. Label the curves and axis.
a. What level of output will maximize the firm's profit?
b. What price will the firm charge?
c. How much revenue will the firms receive in this situation? What is its total cost? Profit?
On your graph, shade the area that represents profit and total cost.
d. How will the situation change in the Long Run?
Hint: Your answer should explain what happens to demand curve in the Long Run. See Lecture notes.

(see diagram in attachment)

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#### Solution Preview

a. What level of output will maximize the firm's profit?
By first order condition, the firm's profit is maximized when MC = MR
i.e., when 30 units are produced.(MR and MC intersect each other)

b. What price will the firm charge?
The corresponding price is found on the demand curve. So \$24 will be charged when 30 units are ...

#### Solution Summary

The LR Equilibrium price is determined.

\$2.19
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