The table below shows the demand and cost data facing "Velvet Touches," a monopolistically competitive producer of velvet throw pillows

Question

Quantity Price Total Revenue Marginal Revenue Total Cost Marginal Cost
1 $30 $32
2 28 43
3 26 53
4 24 64
5 22 76
6 20 90
7 18 106
8 16 126

Use the data to answer the following questions.
a. Complete the Total Revenue (TR), Marginal Revenue (MR), and Marginal Cost (MC) columns above.
b. What are the profit-maximizing price and quantity for Velvet Touches?
c. Is the firm making a profit or a loss? How much is the profit or loss? Show your work.
d. Is this firm operating in the long run or in the short run? Explain your answer.
e. If the firm's profit or loss is typical of all firms in the market for throw pillows, what is likely to happen in the future? Will there be more firms or will some existing firms leave the industry? Explain your answer.
f. What will happen to the typical firm's profit or loss after all entry/exit adjustments?

Answer 1

a.
Quantity Price Total Revenue Marginal Revenue Total Cost Marginal Cost
1 $30 $30 $30 $32 $32
2 28 56 26 43 11
3 26 78 22 53 10
4 24 96 18 64 11
5 22 110 14 76 12
6 20 120 10 90 14
7 18 126 6 106 16
8 16 128 2 126 20

b. Q = 5; P = $22
c. Profit = $(110-76 )= $34
d. The firm is in the short run because it is making profits. In the long run all economic profits will be eliminated.
e. Short-run profits give entrepreneurs an incentive to enter the market and establish new firms. The demand curves for existing firms shift to the left and become more elastic. Entry continues until each firm makes zero economic profit (breaks even).
f. Each firm makes zero economic profit (breaks even).