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Monopolistic Competition: Analyzing the Cost Function

You are the manager of a monopolistically competitive firm. The present demand curve you face is P=100-4Q. Your cost function is C(Q)=50+8.5Q2 (That's Q squared).

a. What level of output should you choose to maximize profits?
b. What price should you charge?
c. What will happen in your market in the long run? Explain.

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Solution Preview

a. What level of output should you choose to maximize profits?

Total Revenue = Price x Quantity

TR = (100 - 4Q) * Q

Cost = 50 +8.5Q^2

Profit = TR - Cost

Profit = 100Q ...

Solution Summary

In about 140 words, this solution provides a clear, step by step analysis on how to use the demand curve and cost function to measure the status of a monopolistically competitive firm. All calculations are provided.

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