Monopolistic Competition with a Homogeneous Product
Monopolistic Competition with a Homogeneous Product
In monopolistic competition, firms produce differentiated products. Moreover, in this Demonstration based on a numerical example found in [1], each one of the monopolistically competitive firms produces a homogeneous product with free entry and exit. The demand function is given by and the cost function is (where is fixed costs).
n
P=1-0.001nq
K=0.28q+F
F
The Demonstration shows the profits, the dead weight losses (DWL), and the average cost pricing for each representative monopolistically competitive firm, given a number of firms in the market and the fixed costs. As you can see, when the fixed costs increase, the long-run zero-profit equilibrium is sustainable with fewer firms.