Monopolistic Competition with a Homogeneous Product

number of firms

6

fixed cost

7

marginal cost		total demand
marginal revenue		average cost

In monopolistic competition, firms produce differentiated products. Moreover, in this Demonstration based on a numerical example found in [1], each one of the

n

monopolistically competitive firms produces a homogeneous product with free entry and exit. The demand function is given by

P=1-0.001nq

and the cost function is

K=0.28q+F

(where

F

is fixed costs).

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.