Monopolistically Competitive Equilibrium
Soft Lens, Inc., has enjoyed rapid growth in sales and high operating profits on its innovative extended-wear soft contact lenses. However, the company faces potentially fierce competition from a host of new competitors as some important basic patents expire during the coming year. Unless the company is able to thwart such competition, severe downward pressure on prices and profit margins is anticipated.
A. Use Soft Lens's current price, output, and total cost data to complete the table:
|
Price ($)
|
Monthly Output (million)
|
TotalRevenue ($million)
|
Marginal Revenue ($million)
|
Total Cost ($million)
|
Marginal Cost ($million)
|
AverageCost ($million)
|
Total Profit ($million)
|
|
$20
|
0
|
|
|
$0
|
|
|
|
|
19
|
1
|
|
|
12
|
|
|
|
|
18
|
2
|
|
|
27
|
|
|
|
|
17
|
3
|
|
|
42
|
|
|
|
|
16
|
4
|
|
|
58
|
|
|
|
|
15
|
5
|
|
|
75
|
|
|
|
|
14
|
6
|
|
|
84
|
|
|
|
|
13
|
7
|
|
|
92
|
|
|
|
|
12
|
8
|
|
|
96
|
|
|
|
|
11
|
9
|
|
|
99
|
|
|
|
|
10
|
10
|
|
|
105
|
|
|
|
(Note: Total costs include a risk-adjusted normal rate of return.)
B. If cost conditions remain constant, what is the monopolistically competitive high-price/ low-output long-run equilibrium in this industry? What are industry profits?
C. Under these same cost conditions, what is the monopolistically competitive low-price/ high-output equilibrium in this industry? What are industry profits?
D. Now assume that Soft Lens is able to enter into restrictive licensing agreements with potential competitors and create an effective cartel in the industry. If demand and cost conditions remain constant, what is the cartel price/output and profit equilibrium?