Impact of Market Structure on Pricing and Output Decisions

The assignment explores the impact of different market structures (monopolistic competition, monopoly, perfect competition) on pricing and output decisions. It includes answers to multiple-choice questions and explanations for each scenario, analyzing the effects of price changes on revenue, demand, and profit maximization. The document also discusses the entry of new firms in a monopolistically competitive market.

Running Head:IMPACT OF MARKET STRUCTURE ON PRICING AND OUTPUT
DECISION
Impact of Market Structure on Pricing and Output Decision
Name of the Student
Name of the University
Author note

1IMPACT OF MARKET STRUCTURE ON PRICING AND OUTPUT DECISION
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................2
Answer 3....................................................................................................................................4
Answer 4....................................................................................................................................5
Answer 5....................................................................................................................................6

2IMPACT OF MARKET STRUCTURE ON PRICING AND OUTPUT DECISION
Answer 1
a) The graph above shows that equilibrium price in the market is above the minimum point of
average variable cost but below the average total cost. This implies by operating in the
market, the firm though unable to recover its total cost entirely but the variable cost is
recovered. This can be used to pay some of its fixed costs. The firm is incurring loss in the
short run. Therefore, it is not a very good decision for this firm to be in the long run.
However, the firm can continue its operation in the short run until price reached to the
minimum point of Average variable cost, which is defined as the shut-down.
b) There is a loss.
c) In the long run, some existing firm will leave and the short run profit will disappear.
Answer 2
a)
Break even point= TFC
P−VC
¿ 30000
25−10
¿ 30000
15
¿ 2000
Therefore, the firm must sell 2000 speedometers to break even
b)
Break even revenue
Revenue=Number of speedometers sold ×unit price

3IMPACT OF MARKET STRUCTURE ON PRICING AND OUTPUT DECISION
¿ 2000 ×25
¿ 50000
c)
If the company sold 3,000 units in the last year then,
Total Revenue=P ×Q
¿ 25 ×3000
¿ 75000
Total Cost =Total ¿ cost+Total variable cost
¿ 30,000+ ( 3000 ×10 )
¿ 30000+30000
¿ 60000
Profit=Total revenue−Total cost
¿ 75000−60000
¿ 15000
d)
If fixed cost rises to $37,500 then new break even quantity is obtained as
Break even point= TFC
P−VC
¿ 37500
25−10

4IMPACT OF MARKET STRUCTURE ON PRICING AND OUTPUT DECISION
¿ 37500
15
¿ 2500
e)
Suppose the new price is P*.
In order to satisfy the stated condition, the following condition needs to be fulfilled
TR−TC=15000
¿ , ( P∗× 2500 ) − {37,500+ ( 2500× 10 ) }=15000
¿ , 2500 P∗− ( 37500+25000 ) =15000
¿ , 2500 P∗−62500=15000
¿ , 2500 P∗¿ 15000+62500
¿ , 2500 P∗¿ 77500
¿ , P∗¿ 77500
2500
¿ , P∗¿ 31
The new price need to be $31.
Answer 3
Quantity
(thousand
s)
Price
Margi
nal
Reven
ue
Avera
ge
Variab
le Cost
(AVC)
Average
Total
Cost
(AC)
Margi
nal
Cost
(MC)
Total
Reven
ue
Total
Cost
Profit
(TR-TC)
0 $1,650 $0
1 1,570 $1,570 $1,281 $2,281 $1,28
1 $1,570 $1,281 $289
2 1,490 1,410 1,134 1,634 987 $2,980 $2,268 $712

5IMPACT OF MARKET STRUCTURE ON PRICING AND OUTPUT DECISION
3 1,410 1,250 1,009 1,342.33 759 $4,230 $3,027 $1,203
4 1,330 1,090 906 1,156 597 $5,320 $3,624 $1,696
5 1,250 930 825 1,025 501 $6,250 $4,125 $2,125
6 1,170 770 766 932.67 471 $7,020 $4,596 $2,424
7 1,090 610 729 871.86 507 $7,630 $5,103 $2,527
8 1,010 450 714 839 609 $8,080 $5,712 $2,368
9 930 290 721 832.11 777 $8,370 $6,489 $1,881
10 850 130 750 850 1,011 $8,500 $7,500 $1,000
a)
Maximum profit earned by the firm is $2,527. The highest profit corresponds to the
price $1,090. Therefore, the firm should charge $1,090 to maximize profit in the short run. At
this price marginal revenue is very close to marginal cost
b)
If the firm is willing to charge a price less than profit maximizing price, then the
objective of the firm is to minimize its cost. As shown from the table the minimum cost is
associated with a price of $1.570, which is greater than the profit maximizing price. At this
price quantity is less than the optimum quantity.
c)
A revenue maximizing firm charges price lower than the profit maximizing price. The
maximum total revenue that the firm can earn is $8,500. In order to achieve this much
revenue, the firm should charge a price of $850, less than the profit maximizing price. In this
case, output is greater than optimal quantity of 7000.
Answer 4
a)
At price $60, total market demand is 30,000

6IMPACT OF MARKET STRUCTURE ON PRICING AND OUTPUT DECISION
Each firm has one third of total market.
Therefore, demand for each firm = (30,000/3) = 10,000
Revenue of each firm = (10,000*$60) = $6,00,000
Now, if each firm reduces price to $50, then demand increases to 35,000.
The new demand for each firm = (35,000/3) = 11666.67
Revenue of each firm = (11666.67*$50) = $5,83,3333.33
Each firm would now receive a lower revenue. A lower revenue in turn means a lower profit.
b)
At price $70, market demand would reduce to 25,000
The demand for each firm would then be = (25,000/3) = 8333.33
Revenue of each firm = ($70*8333.33) = $5, 83,333. 33
The revenue is same as that with a price of $50. The revenue is still lower than the revenue
earned with price equals $60. Therefore, $70 would not lead to any better positon for the
firm.
Answer 5
a)
Profit maximizing condition in a monopolistically competitive market
MR=MC
Given that,

7IMPACT OF MARKET STRUCTURE ON PRICING AND OUTPUT DECISION
MR = $45 - $0.4Q
MC = $5
Therefore, equating MR and MC the profit maximizing quantity is obtained as
45−0.4 Q=5
¿ , 0.4 Q=40
¿ , Q= 40
0.4
¿ , Q=100
b)
Profit maximizing price
P=$ 45−$ 0.2 Q
¿ $ 45− ( $ 0.2× 100 )
¿ $ 45−$ 20
¿ $ 25
c)
Total Revenue=Price× Quantity
¿ 25 ×100
¿ 2500
d)
Profit=Total Revenue−Total Cost

8IMPACT OF MARKET STRUCTURE ON PRICING AND OUTPUT DECISION
Total revenue = $2500
Total Cost =$ 500+$ 5Q
¿ $ 500+ ( $ 5× 100 )
¿ $ 500+$ 500
¿ $ 1000
Profit=$ 2500−$ 1000
¿ $ 1500
e)
As obtained in d, firms in this industry would enjoy an above normal profit by charging profit
maximizing price and quantity. The industry would then become more attractive to other
firms. Therefore, in the long run new firms will enter in this market.