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Chapter 10: Problem 8

How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?

Short Answer

Expert verified
To determine whether a monopolistic competitor will earn profits or experience losses, the firm should compare the price they are charging with their average total cost (ATC). If the price is greater than the ATC, the firm will earn profits, and if the price is less than ATC, the firm will experience losses. This can be calculated using the formula: Profit or Loss per unit = Price - ATC. By comparing the price and ATC, the firm can understand their financial situation given the current market and production conditions.

Step by step solution

01

Determine the Price and Average Total Cost (ATC)

First, the monopolistic competitor needs to determine the price they are charging for their product and find the average total cost (ATC) of producing that product.
02

Compare the Price with the ATC

Next, the firm needs to compare the price they are charging with the ATC. If the price is greater than the ATC, the firm will earn profits because the revenue they receive from selling each unit of the product is greater than the cost of producing it. If the price is less than the ATC, the firm will experience losses because the revenue they receive from selling each unit is less than the cost of producing it. To calculate profit or loss per unit, we can use the following formula: Profit or Loss per unit = Price - ATC
03

Determine if the Firm Will Earn Profits or Experience Losses

Based on the comparison of the price and ATC, we can determine if the firm will earn profits or experience losses. - If the Price > ATC, then the firm will earn profits because they earn more revenue than the cost of producing the product. - If the Price < ATC, then the firm will experience losses because they do not earn enough revenue to cover their production costs. By comparing the price charged by a monopolistic competitor with its average total cost, the firm can determine whether they will make profits or experience losses given the current market and production conditions.

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Most popular questions from this chapter

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as the prisoner's dilemma box in Table 10.4 shows. $$\begin{array}{l|l|l}\hline & \begin{array}{l}\text { Firm B colludes with Firm } \\\\\text { A }\end{array} & \begin{array}{l}\text { Firm B cheats by selling more } \\\\\text { output }\end{array} \\\\\hline \text { Firm A colludes with Firm B } & \begin{array}{l}\text { A gets } \$ 1,000, \text { B gets } \\\\\$ 100\end{array} & \text { A gets \$800, B gets \$200 } \\\\\hline \begin{array}{l}\text { Firm A cheats by selling more } \\ \text { output }\end{array} & \begin{array}{l}\text { A gets \$1,050, B gets } \\\\\$ 50\end{array} & \text { A gets \$500, B gets \$20 } \\\\\hline\end{array}$$ Assuming that both firms know the payoffs, what is the likely outcome in this case?

Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.

Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not?

What is the relationship between product differentiation and monopolistic competition?

Continuing with the scenario in question \(1,\) in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm's profit, what will happen to the original firm's profit-maximizing price and output levels?
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