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CA Foundation · Business Economics · Price Determination in Different Markets

A monopolistically competitive firm has demand P = 80 - Q and total cost TC = 400 + 20Q. It maximises profit in the short run. Which statement is correct?

The firm earns supernormal profit of ₹500, so entry is expected. Equating MR (80 - 2Q) with MC (20) gives Q = 30 and price ₹50. Revenue is ₹1,500 against total cost of ₹1,000, leaving ₹500 profit above normal returns.

  1. AIt earns supernormal profit of ₹500, so new entry is expectedCorrect
  2. BIt earns exactly normal profit, so it is in long-run equilibrium
  3. CIt incurs a loss of ₹100, so exit is expected
  4. DIt earns supernormal profit of ₹900, so new entry is expected

Explanation

MR = 80 - 2Q equals MC = 20, so Q = 30 and P = 50. TR = 1,500; TC = 400 + 600 = 1,000. Profit = ₹500, which is supernormal, so entry is expected. Check: AC = 1000/30 = 33.3 < P = 50. Profit of ₹900 ignores fixed cost.

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