ECON 100 Monopolistic Competition Model Answers

St. Charles Community College
ECON 100   Survey Economics
Monopolistic Competition Example

Assume a firm that produces a single product and is operating as a monopolistic competitor.  We are given the following demand schedule for the firm’s product:

Price
Quantity
($)
(Units)
16
0
15
300
14
600
13
900
12
1200
11
1500
10
1800
9
2100
8
2400
7
2700
6
3000

Part a:
Using the data shown above, and utilizing the axes shown on the next page, construct a demand curve for the firm.

 

Part b:
Assuming that the curve has a variable and a fixed cost schedule that contains the following values:

Quantity Fixed Costs
Variable Costs
(Units/Mo)
($)
($)
0
4100
0
300
4100
2300
600
4100
3000
900
4100
3900
1200
4100
5000
1500
4100
6300
1800
4100
7800
2100
4100
9500
2400
4100
11400
2700
4100
13500
3000
4100
15800


Now we can calculate other needed data such as average costs, marginal costs, and profits.

Quantity (Units Per Month)
Fixed Costs ($)
Variable Costs
 ($)
Total Costs ($)
 Marginal Costs 
 ($)
Average Total Costs ($)
Price  ($)
 Total Revenue ($)
 Marginal Revenue ($)
Profit  
($)

0
4100
0
4100

0
16

0

300
4100
2300
6400
7.67
21.33
15
4500
15
(1900.00)
600
4100
3000
7100
2.33
11.83
14
8400
13
1300.00
900
4100
3900
8000
3.00
8.89
13
11700
11
3700
1200
4100
5000
9100
3.67
7.58
12
14400
9
5300.00
1500
4100
6300
10400
4.30
6.93
11
16500
7
6100.00
1800
4100
7800
11900
5.00
6.61
10
1800
5
6100.00
2100
4100
9500
13600
5.67
6.48
9
18900
3
5300.00
2400
4100
11400
15500
6.33
6.46
8
19200
1
3700.00
2700
4100
13500
17600
7.00
6.52
7
18900
-1
1300.00
3000
4100
15800
19900
7.67
6.63
6
18000
-13
(1900.00)


The following formulas are given as a guide in your calculations:

  1. Total cost = (fixed cost) + (variable cost)
  2. Marginal cost = (change in total cost)  /  (change in output or quantity)
  3. Average total cost = (Total cost) / (Output or quantity)
  4. Total revenue = (Price) X (Quantity)
  5. Marginal Revenue = (Change in total Revenue) / (Change in output)
  6. Profit = (Total Revenue) – (Total Cost)


Part c:
Using the calculated data and the following set of axes, plot the total revenue curve and the total cost curve.  Then locate the region of the graphs which represent the maximum profit level of the firm.

  
Part d:
Using the data that you calculated in the previous parts, plot the demand curve, the marginal revenue curve, the marginal cost curve, and the average total cost curve.
  

Part e:
Using the calculated data from part “b”, plot the firm’s profit curve.

Summary:
In review, let’s look at the information that we have developed in this example problem:

  1. We have shown that the firm’s maximum profit is at the level of operation where marginal cost equals marginal revenue.  In other words, we have defined a profit maximizing firm.
  1. Since all previous examples of profit maximization were shown with the perfect competition model, we have demonstrated that the same rules of profit maximization hold for the monopolistic competition model.


GWB  3/29/04