Question

A new competitor enters the industry and competes with a second firm, which had been a monopolist. The second firm finds that although demand is not perfectly elastic, it is now more elastic. What will happen to the second firm's marginal revenue curve and to its profit-maximizing price?

Short answer

The minimum feasible long-run average price for businesses in a given perfectly competitive sector has been set at $\$40$per unit.

Step-by-step solution

Introduction.

At the market price, the marginal revenue curve is a horizontal line, implying perfectly elastic demand, and it is equal to the demand curve. Monopolistic occurs when a single company is the single seller of a differing product in a market.

Given Information. 

A new challenger needs to enter the industry and wants to compete with an existing monopolist.

The second firm discovers that, while demand is not perfectly elastic, it is becoming more elastic.

Explanation.

It has been stated that in a perfectly competitive industry, every firm produces an output that coincides with long-run equilibrium.

In the long run, all markets are in equilibrium, and all price and quantity have fully adjusted and are still in equilibrium. The long-run differs from the short-run, which has some constraints and markets that are not fully in equilibrium.

Profit-maximizing price.

As is well known, in the long run, price equals marginal revenue, which equals marginal cost, which equals the minimum feasible long-run and short-run average cost.

The minimum feasible long-run average price for firms in a given perfectly competitive industry has been specified as $\$40$per unit.

As a result, both the marginal cost and the market price would be $\$40$per unit.