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**St. Charles Community CollegeECON 100 Survey EconomicsMonopolistic 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:

- Total cost = (fixed cost) + (variable cost)
- Marginal cost = (change in total cost) / (change in output or quantity)
- Average total cost = (Total cost) / (Output or quantity)
- Total revenue = (Price) X (Quantity)
- Marginal Revenue = (Change in total Revenue) / (Change in output)
- 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:

- 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.

- 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