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Firm 1 is a member of a monopolistically competitive market. Its total cost function is C = 900 + 60Q1+ 9Q 2. The demand curve for the firm's differentiated product is given by P = 660 - 16Q1:
a. Determine the firm's profit-maximizing output, price, and profit.
b. Attracted by potential profits, new firms enter the market. A typical firm's demand curve (say, firm 1) is given by P = [1,224 - 16(Q2 +Q3+ . . . + Qn) - 16Q1, where n is 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 firms, each producing 6 units at a price of $264. Is this claim correct? (Hint: For the typical firm, 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 isP = 1,224 - 16Q, where Q is total output.) Compare this outcome to the outcome in part (b).
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