# 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