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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.

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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