Company ABC is a member of a monopolistically competitive market. Its total cost function is C = 900 + 60Q1 + 9Q1
2 . The demand curve for the firm’s differentiated product is given by P = 660 − 16Q1 .
a. What is the company’s profit-maximizing output, price, and profit?
b. New companies start to enter the market. A typical firm’s demand curve (say, Company ABC) is given by P = 1,224 − 16(Q2 + Q3 + … + Qn ) − 16Q1 , where n = the total number of firms. (If competitors’ outputs or numbers increase, firm 1’s demand curve shifts inward.) The long-run equilibrium under monopolistic competition is claimed to consist of 10 companies, each producing 6 units at a price of $264. Is this claim correct? (Hint: For the typical company, check the conditions MR = MC and P = AC.)
c. Based on the cost function given, what would be the outcome if the market were perfectly competitive? (Presume market demand is P = 1,224 − 16Q, where Q is total output.) Compare this outcome to the outcome in part (b).