3.Consider a firm engaged in monopolistic competition.

• It faces the following average cost: AC = n(F/S) + c
• It also follows this optimal pricing rule:P=c+1/(bn)

In the above functions,ACstands for average cost,nstands for number of firms (or brands) engaged in the industry,Fstands for the fixed cost,Sstands for industry size,cstands for the marginal cost,Pstands for the optimal price, andbis a constant term representing the responsiveness of a firm's sales to its price.

As industry size increases, the:

Group of answer choices

A: average cost increases (implying external economies of scale).

B: average cost declines (implying external economies of scale).

C: average cost declines (implying internal economies of scale).

D: average cost increases (implying internal economies of scale).

4.Consider the information in Question No. 3. As number of firms (or brands) increase:

Group of answer choices

A: The optimal price declines (resulting from greater competition).

B: The optimal price increases (resulting from greater competition).

C: The optimal price increases (resulting from greater monopolistic power).

D: The optimal price declines (resulting from greater monopolistic power).

5. Consider the information in Question No. 3. We are going to calibrate the AC and P functions using the assumed values below:

• SetFequal to 210 (measured in currency units)
• SetSequal to 5000 (measured in quantity units)
• Setcequal to 15 (measured in currency units)
• Setbequal to 0.67 (with no units)

Fixing the above values,nremains a variable. Allownto vary from 1 to 2 to 3 ... to 10. Then, find the equilibrium number of firms (n*). Under the above assumptions, n* is equal to _____ firms (or brands).

Note: enter the numerical answer below.

6. Consider the information in Question No. 5. All else being constant, how an increase in industry size from 5000 units to 11,500 units change theequilibrium number of firms (n*)? It would increase n* to:

Group of answer choices

5

7

6

10

9

8

7 Consider your answer to Question No. 6. What would happen to equilibrium price (P*) once industry size increases?

Group of answer choices

A: It declines.

B: It remains the same.

C: It increases.