Worksheet Chapter 14 Monopolistic Competition

Use the following figure, which shows the situation facing a producer of running shoes, to
answer the questions below.

1.) What quantity does the profit maximizing firm produce and what price does it charge?
2.) What is its economic profit?
3.) In the long run, how does the number of firms producing running shoes change?
 Solution

1.) To maximize profit, the firm produces the quantity at which marginal revenue equals
marginal cost, so it produces 100 pairs a week. The firm charges the highest price that
enables it to sell the 100 pairs of shoes. As read from the demand curve, the firm
charges $80 a pair.

2.) Economic profit equals total revenue minus total cost. The price is $80 a pair and the
quantity sold is 100 pairs, so total revenue is $8,000. Average total cost is $60 a pair, so
total cost equals $6,000. Economic profit equals $8,000 minus $6,000, so the firm makes
an economic profit of $2,000 a week.

3.) The firm is making an economic profit. This profit attracts entry into the market so the
number of firms increases.