Comparing Market Structures Exercise 9-2

Figure A represents the Average and Total Profits of perfect competition market. At the Q1 output the average cost is AC1, the total profit is equal to the average profit times the quantity produced.

Figure B represents the Monopolistic competition market, D1 is an elastic demand curve with its associated marginal revenue curve MR1. AC and MC are the normal U-shaped cost curves. The area P1aQ10 represents total revenue. Similarly, C1bQ10 represents total costs.

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Figure C represent the Oligopoly markets, the discontinuity in the marginal revenue curve is the result of the kink in the demand curve. MC1 is the original marginal cost curve. Quantity Q1 is the profit-maximizing output that results in price P1. An increase in marginal cost from MC1 to MC2 results in no change in equilibrium price or quantity.

Figure D is for the Monopoly market, its present AC curve is higher than the demand curve at all output levels. Its best option will be to minimize its losses by producing at the point where its marginal revenue equals its marginal cost, that is where these curves intersect at a quantity Q1. It would charge a price of P1 and would incur an economic loss denoted by the shaded area, AC1abP1