Many principles
of economics texts do not correctly draw the graph showing zero economic profit
for a monopolistically competitive firm. The average total cost curve and the
marginal cost curve are not consistent with each other. That is, they are not
derived from the same total cost curve (as shown by numerical inspection of
these curves). Also, the marginal revenue line is often not twice as steep as
the demand line.
Using a total
cost curve of the form TC = fixed cost + aQ3 – bQ2 + cQ
and a linear demand line, I find the general form equation for calculating the
slope and intercept of both demand and marginal revenue for a chosen quantity.
That quantity is such that P = ATC, MR = MC, the slope of marginal revenue is
twice as steep as the demand line and both the ATC and MC lines are derived
from the same total cost curve. These equations are used to generate the
correct graph in a spreadsheet program.
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