Author Question: The observation that the demand curve for grape jelly shifts rightward every time the price of ... (Read 63 times)

berenicecastro · **on:** Jun 29, 2018

The observation that the demand curve for grape jelly shifts rightward every time the price of peanut butter falls means that grape jelly and peanut butter are

A) complements.
B) substitutes.
C) inferior goods.
D) normal goods.

Question 2

The demand and cost schedules for a firm in monopolistic competition are in the above tables.

What is the profit-maximizing level of output and price? What amount of profit is the firm earning? Is this firm in a short-run or long-run equilibrium? Why?

s.meritte · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

A

Answer to Question 2

To determine the quantity produced, the firm will set marginal cost equal to marginal revenue. Therefore it is necessary to determine the marginal revenue. The marginal revenue going from 3 to 4 units is 12 and the marginal revenue going from 4 to 5 units is 8. Thus the marginal revenue at 4 units is 10, which equals the marginal cost. Therefore the firm produces 4 units. The demand schedule shows that for 4 units, the price will be 16 per unit. The firm's economic profit per unit equals the price, 16, minus its average total cost, 10.50, or an economic profit of 5.50 per unit. The firm produces 4 units, so its total economic profit is 22.00. The firm is in a short-run equilibrium because it is able to earn an economic profit. In the long run, entry will decrease its demand so that it no longer can earn an economic profit.