A firm has the following short run inverse demand and cost schedules for a particula

product:
P = 45 - 0.2Q
TC = 500 + 5Q
A) At what price should this firm sell its products?

B) If this is monopolisitcally competitive firm, what do you think would happen

as the firm moves toward the long run? Explain.

C) suppose in the long-run, that inverse demand shifts P = 45 - 0.8Q. What

should the firm do? Explain. Provide graphs for both the short-run and long-
run scenarios. Make sure your graphs include MR, MC, AC. Does the demand
in part c or part d represent a change in market share for the representative
firm as a result of the entry or exist suggested in part b?

Answer
P = 45 - 0.2Q

TC = 500 + 5Q

MC= differentiation of TC curve wrt Q

MC=5

a. Firm will charge maximum price to gain highest profit. so monopoly price would be
where MR=MC

P = 45 - 0.2Q

R= PQ=45Q-.2Q^2

MR=45-.4Q

profit maximisation where MR=MC

45-.4Q=5

Q=100

price=25

b.

If this is monopolistically competitive firm, then in long run new firm will enter into the
market till the profit is greater than zero. Entry of new firm will increase the number of
firm, quantity supplied and will reduce the price charge. as a result the market will move
towards perfectly comeptative structure and p=MC=5, Q=200.
C.

Inverse demand curve P=45-.8Q

P=MC=5

Q=50

since quantity demanded is less than previous one, so some firm will exit the market and
as a result profit for individual firm will come to zero from negative.