What is Monopolistic Competition
Example of Monopolistic Competition
We may now use a typical problem to illustrate the case of monopolistic competition where advertisement and selling costs play a crucial role.
Suppose, in addition to our standard variables of price (P), output (Q) and total costs (C), we have now advertisement (A) such that a competiting monopolist faces the following demand and cost-,
P= 1 00-3Q +4
Assuming profit maximization, the objective function is now read as:
= 100Q- 3Q22 4 √A - 4Q2-10Q-A
Note, the firm has now t>NO decision variables Q and A.
Accordingly, the firm should satisfy its first order and second order conditions as follows:
= 100 - 6Q + 4 √A - 8Q-10 ...(i)
=[90 - 14Q + 4 √A ] ...(ii)
Setting (ii) equal to zero, we get =2Q ...(iii)
Plugging (iii) in (i) and setting (i) equal to zero by way order requirement, we get
[90 14Q+8Q]= 0 => Q = 15; on plugging this in (ii), we get
Note, the second order condition have also been satisfied with regard do both Q and A. Thus we have of optimum values for Q and A.
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