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CA Foundation · Business Economics · Price Determination in Different Markets

A firm in monopolistic competition faces the demand curve P = 50 - Q and has total cost TC = 100 + 10Q. At the profit-maximising output, which statement is correct?

The firm earns supernormal profit of Rs 300. Equating MR (50 - 2Q) with MC (10) gives 20 units at a price of Rs 30, so revenue is Rs 600 against cost of Rs 300. Such profit attracts new entrants, shifting the demand curve left in the long run.

  1. AThe firm earns supernormal profit of Rs 300, so new firms will tend to enter and shift its demand curve leftCorrect
  2. BThe firm earns supernormal profit of Rs 400, so existing firms will exit
  3. CThe firm earns only normal profit, so there is no entry
  4. DThe firm incurs a loss of Rs 100, so firms will exit

Explanation

TR = 50Q - Q², so MR = 50 - 2Q. MC = 10. Setting 50 - 2Q = 10 gives Q = 20 and P = 30. TR = 600; TC = 100 + 200 = 300. Profit = Rs 300. Supernormal profit attracts entry, which shifts each firm's demand curve left until profit falls to normal. Rs 400 ignores the fixed cost of Rs 100.

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