Suppose that a typical firm in a monopolistically competitive industry faces a demand curve given by: q = 60 − (1/2)p, where q is quantity sold per week. The firm’s marginal cost curve is given by: MC = 60. How much will the firm produce in the short run? What price will it charge? In addition to providing the quantitative answers for the question, please also describe the approach you used to arrive at your conclusions.

Explanation:

In a monopolistic firm, demand curve = average (AR) curve. Given, q=60- (1/2)P, then the price (P) would be as below:

(1/2)P= 60-q

P= 120-2q

:

a) Quantity = 15 Units

b) Price = 90

Explanation:

First, we know we are dealing with a Monoplistically competitve firm and as such the calculations are as follows

Q = 60-(1/2)P

Therefore, 1/2 P = 60-Q

P = (60-Q)2 - First Equation

Second Equation

TR = P-Q

TR= (120-2Q)Q

TR= 120Q -2Q∧2

MR = dTR/dQ = 12- (1) - 2 x 2Q

= 120-4Q

Based on these Formula,

The Profit Maximizing Condition = MR=MC

Where Marginal Revenue = Marginal Cost

As such

120-4Q = 60

120-60 = 4Q

Q = 60/4 = 15 units

Therefore, the units to be produced in the short run = 15 units

2) The Price the firm will charge for the units produced

In order to arrive at the price, we use the price equation and substitute 15 for Q

Price Equation

P = 120 - 2(Q)

P = 120 - 2(15)

P= 120-30

P= 90

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