Monopolistic Competition Consider an undifferentiated monopolistic competition market. Firms have identical production functions, with constant marginal cost=35 and fixed costs. Firms choose output according to a Cournot quantity setting game. Market prices and variable profits as a function of the number of entrants are given in the following table. N Firms 1 2 Price 80 60 50 45 Per Firm Variable Profits 800 500 350 300 3 4 a) If fixed costs are 700, how many firms enter the market and what are the total profits of each firm? What if fixed costs are 300? b) What is meant by the First-Best? What number of firms and what price would achieve the first best? c) What is meant by the Second-Best? Describe a policy that might achieve the second best. d) Suppose instead the firms sold differentiated products. Discuss how the price and per firm variable profits entries in the above table would change. (No need to calculate). e) For any given fixed cost, how would the number of entrants change? f) From an efficiency perspective, why might the market with differentiated products have too few firms? Monopolistic Competition Consider an undifferentiated monopolistic competition market. Firms have identical production functions, with constant marginal cost=35 and fixed costs. Firms choose output according to a Cournot quantity setting game. Market prices and variable profits as a function of the number of entrants are given in the following table. N Firms 1 2 Price 80 60 50 45 Per Firm Variable Profits 800 500 350 300 3 4 a) If fixed costs are 700, how many firms enter the market and what are the total profits of each firm? What if fixed costs are 300? b) What is meant by the First-Best? What number of firms and what price would achieve the first best? c) What is meant by the Second-Best? Describe a policy that might achieve the second best. d) Suppose instead the firms sold differentiated products. Discuss how the price and per firm variable profits entries in the above table would change. (No need to calculate). e) For any given fixed cost, how would the number of entrants change? f) From an efficiency perspective, why might the market with differentiated products have too few firms