3 The figure below illustrates the cost of production for a

3. The figure below illustrates the cost of production for a monopolistically competitive firm with the firm\'s average total cost curve (ATC) and marginal cost curve (MC). The figure also shows the demand for the firm\'s output (D) and the corresponding marginal revenue. Suppose the industry is in the short run. a) b) e) Using the additions to your graph, characterize the firm\'s economic profits. In the graph below, indicate the profit-maximizing price and quantity (using the line drawing tool or arrows, for example). Indicate the average total cost of production for the profit-maximizing quantity in the figure. d) Assume advertising is a fixed cost. If the firm were to begin advertizing, how would the profit-maximizing price and quantity change? S, Cost per unit of output ATC MC MR Quantity (units)

Solution

In the monopolistic competition the producer would tend to produce a lower output at a high cost and charges a high price for the commodity. So when the cost rises the producer will prouces less of the product and charges a high price. In this situation the advertising is a fixed cost so they do not vary with the output, so here the profit maximizing quantity and the price will be unaffected if the advertising is a fixed cost. The fixed costs already made when the production begins this will not increase the total cost of the firm and there will be no shift in the avergae total cost curve. Since the total costs are the same the it will not shift the price so the the price and quantity will remain the same.