In perfect competition, equilibrium point is when P=MR=MC.
Q2e) Initially the firms increased when the existing firms were earning supernormal profits i.e. when average revenue was greater than average cost. As more and more firms entered the industry the share of profit for each firm started getting less and less and may firms left the industry. Hence in the long run, there will be only enough firms in the market to break-even and a no profit, no loss situation.
Q3) The profit maximizing price will be $14 and quantity will be 4 items per minute if the firm is a monopolist. This is the price and quantity because here the monopoly profit is the highest at $32. The monopoly profit is calculated by taking the difference between the TR and TC.
The other approach by which we can prove that this is the profit maximizing price and quantity is MR>MC. At quantity 4 items per minute, MR is $8 and MC is $5. Beyond this point, increasing quantity will cause MR to be less than MC and the monopolist wont be maximizing profits. For instance if quantity is increased to 5 items per minute, MC will increase to $6 and MR will decrease to $4 and hence not a profit maximizing condition.
Q4c) Over the range of prices between $14 and $16 on average, a 1% reduction in price increases quantity demanded by 2.14%. Since elasticity is greater than 1 at this point, it means that consumers are highly responsive to a change in price and will quickly move to substitutes.
Over the range of prices between $6 and $8 on average, a 1% reduction in price increases quantity demanded by 0.46%. Since elasticity is less than 1 at this point, it means price elasticity of demand is inelastic and the consumers are more or less indifferent to changes in price and will not move to substitutes.
The price elasticity of Splots at 2.68 shows that Splots has an elastic demand and that consumers are responsive to changes in price. This means that if price of Splots will rise, the quantity