13
MONOPOLISTIC
COMPETITION AND
OLIGOPOLY
Answers to the Problems
1.
a.
Lite and Kool produces 100 pairs a week.
To maximize profit, Lite and Kool produces the quantity at which marginal revenue equals
marginal cost.
b.
Lite and Kool charges $80 a pair.
To maximize profit, Lite and Kool charges the highest price for the 100 pairs of shoes, as
read from the demand curve.
c.
Lite and Kool makes a profit of $2,000 a week.
Economic profit equals total revenue minus total cost. The price is $80 a pair and the
quantity sold is 100 pairs, so total revenue is $8,000. Average total cost is $60 a pair, so total
cost equals $6,000. Economic profit equals $8,000 minus $6,000, which is $2,000 a week.
2.
a.
The price of a pair of running shoes falls in the long run.
Lite and Kool is earning an economic profit. This profit attracts entry into the market. As
new firms enter, the demand for Lite and Kools’ shoes decreases. The decrease in demand
leads to the price of running shoes falling.
b.
The quantity of running shoes produced by Lite and Kool decreases in the long run.
Lite and Kool is earning an economic profit. This profit attracts entry into the market. As
new firms enter, the demand for Lite and Kools’ shoes decreases. The decrease in demand
leads to the quantity of running shoes produced by Lite and Kool decreasing.
c.
The quantity of running shoes in the market as a whole increases in the long run.
Lite and Kool is earning an economic profit. This profit attracts entry into the market. As
new firms enter, each initial firm decreases its output a bit. But the new firms produce more
shoes and, on net, the quantity of shoes in the entire market increases.
d.
Lite and Kool does not produce at the minimum of the average total cost in the long run.
Lite and Kool is a monopolistically competitive firm. In the long run, monopolistically
competitive firms produce less output than the amount which minimizes the average total
cost.
3.
a.
The average total cost of a jacket is $200.
The average total cost equals the total cost divided by the quantity. The fixed cost is $2,000.
Because the marginal cost is $100 per jacket, the total variable cost is $2,000. So the total
cost is the $2,000 fixed cost plus the $2,000 variable cost, or $4,000. So the average total
cost is $4,000/20, which is $200.
b.
The average total cost of a jacket is $180.
The average total cost equals the total cost divided by the quantity. The fixed cost is $4,000.
Because the marginal cost is $100 per jacket, the total variable cost is $5,000. So the total
cost is the $4,000 fixed cost plus the $5,000 variable cost, or $9,000. The average total cost is
$9,000/50, which is $180.