<p>It is possible for firms to have constant marginal costs in monopolistic competition in theory. Nevertheless, they must also have fixed costs. The fixed costs prevent firms from entering in sufficient numbers such that you would have perfect competition. </p>

<p>As to whether constant marginal costs are realistic in you scenario, that depends on what you believe about the industry in practice. That would require detailed knowledge and expertise of this specific industry, which you are unlikely to find on this site.</p>

<p>Note, however, that just because the company has already bought the materials does not neessarily mean that these costs do not matter. For example, the company may still want to use less material per production output, because it could resell the unused materials. So the company in that case still cares about the costs associated with the use of each unit of material.</p>

<p>It is a bit unclear in your example what this company actually produces. However, if you think the costs of producing one extra unit are the same, regardless of how many units you have already produced, then you are justified in assuming constant marginal costs.</p>

CC BY-SA 3.0
2018-04-26T12:29:04.623Z
Thank you for your detailed answer. I can see how my original post was a bit unclear in regards to the actual product. It is not a production company, but a service company. It is a construction firm, but the scaffolding used is only rented out to the clients - meaning they do not have any increase in costs if they sell an extra unit (Q)
oliverbj
CC BY-SA 3.0
2018-04-26T12:41:11.367Z
I see. Well then, the main variable cost component seem to be gas for transportation and depreciation of the vehicles. I assume here that if you rent out more units then you will have to transport more. If you are willing to assume that the gas expenditure is the same whether they have to transport to 1 location or several, i.e. if you are willing to assume that the gas expenditure (and depreciation) per mile is independent of distance, then you can assume constant marginal costs. I presume such an assumption is not strictly true for gas, but should be a good approximation for your purposes.
BB King
CC BY-SA 3.0
2018-04-26T13:16:15.573Z
Exactly. I am however assuming that they only have X amount of scaffolding available to service X number of units - and they don't want to increase this. This means they have a limit on how many units they can work on.
I am a little confused regarding the gas cost. If I assume a gas cost for each unit on USD 100 pr. unit, it will still cost USD 100 for the next unit, and the next unit etc. - thus making the marginal cost constant on USD 100. Is this a correct assumption?
oliverbj
CC BY-SA 3.0
2018-04-26T13:56:23.197Z
That would be a correct assumption, but gas consumption by cars can vary depending on the distance and associated speed. If you get on the highway you might need less (or more) gas per mile than if you drive short distances within the city. It depends a bit on the car and its efficiency.
BB King
CC BY-SA 3.0
2018-04-26T14:04:21.857Z
Yes, and that's where it gets a bit tricky. The way I understand, marginal cost is the extra cost associated with producing/servicing one more unit. (Q). So even if this company produces 100 units, compared to let's say 50 units, transportation cost would still be the AROUND same (USD 100). (In this assignment, I don't have access to accurate data regarding distance to sites etc.)
oliverbj
CC BY-SA 3.0
2018-04-26T14:20:42.350Z
You understand marginal costs correctly. Are you saying that transportation costs are 100USD for producing 100 units and 50 units? In that case you do not have constant marginal costs, but rather decreasing marginal costs, because the first 50 units costs 100 USD but the next 50 units cost 0 USD. If the cost increase for extra units is constant, then you have constant MC. Another way to conceptualize constant MC is to say you have a linear cost function. If you can draw a straight line for your total costs as a function of output, then you have constant marginal costs. Otherwise you do not.
BB King
CC BY-SA 3.0
2018-04-27T08:52:04.973Z
But a total cost function will never be a straight line? How can it be? If MC is constant at example USD100, the TC function will still be 100*Q*FC (where FC is fixed costs), meaning the total cost function will increase the more units you are selling.
oliverbj
CC BY-SA 3.0
2018-04-27T09:08:53.257Z
The total cost function will increase, that's true. The line does not have to be flat, it can have a positive slope. But it mus be a line (no wiggles). Costs can go up with Q, but the cost function has to be able to be drawn perfectly from two points if MC is constant. Furthermore, the costs would not be how you describe. They would be 100Q + FC. In this case the slope is 100 and the MC is constant.
BB King
CC BY-SA 3.0
2018-04-26T12:17:24.027Z
2018-04-26T12:17:24.027Z
BB King
<p>I would like to know if it is possible to have constant marginal costs (MC) in a business that is operating on a market, that is defined by monopolistic competition?</p>

<p>The company is a construction company, more specific a scaffolding company. My assumption is based on:</p>

<ul>
<li>They have invested in their building materials <strong><em>one</em></strong> time. This means that they have a natural limit on how much work they can do. </li>
<li>They don't expect to buy more building materials in order to do more work, since they are also limited by number of employees.</li>
<li>All employees are on a fixed salary.</li>
<li>The only variable cost that is associated with each construction job is the transporation to/from site.</li>
</ul>

<p>Since there is only one variable cost - the transportation, I am assuming that the marginal costs are constant, since transportation doesn't cost more whether they have 1 site (Q) or 10 sites (Q) to maintain.</p>

<p>Is this a valid assumption? Is it possible to have a constant MC such a market?</p>

<optimization><marginal><monopolistic-competition>
Constant MC - Monopolstic Competition
oliverbj
# Constant MC - Monopolstic Competition

(Asked by: username_0 on 2018-04-26)

I would like to know if it is possible to have constant marginal costs (MC) in a business that is operating on a market, that is defined by monopolistic competition?

The company is a construction company, more specific a scaffolding company. My assumption is based on:

* They have invested in their building materials ***one*** time. This means that they have a natural limit on how much work they can do.
* They don't expect to buy more building materials in order to do more work, since they are also limited by number of employees.
* All employees are on a fixed salary.
* The only variable cost that is associated with each construction job is the transporation to/from site.

Since there is only one variable cost - the transportation, I am assuming that the marginal costs are constant, since transportation doesn't cost more whether they have 1 site (Q) or 10 sites (Q) to maintain.

Is this a valid assumption? Is it possible to have a constant MC such a market?

**Tags:** optimization, marginal, monopolistic-competition


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## 1 answers

### Answer by username_1 on 2018-04-26. Score: 2 | Accepted answer

It is possible for firms to have constant marginal costs in monopolistic competition in theory. Nevertheless, they must also have fixed costs. The fixed costs prevent firms from entering in sufficient numbers such that you would have perfect competition.

As to whether constant marginal costs are realistic in you scenario, that depends on what you believe about the industry in practice. That would require detailed knowledge and expertise of this specific industry, which you are unlikely to find on this site.

Note, however, that just because the company has already bought the materials does not neessarily mean that these costs do not matter. For example, the company may still want to use less material per production output, because it could resell the unused materials. So the company in that case still cares about the costs associated with the use of each unit of material.

It is a bit unclear in your example what this company actually produces. However, if you think the costs of producing one extra unit are the same, regardless of how many units you have already produced, then you are justified in assuming constant marginal costs.

> **Comments:**
> **username_0**: Thank you for your detailed answer. I can see how my original post was a bit unclear in regards to the actual product. It is not a production company, but a service company. It is a construction firm, but the scaffolding used is only rented out to the clients - meaning they do not have any increase in costs if they sell an extra unit (Q)  
> **username_1**: I see. Well then, the main variable cost component seem to be gas for transportation and depreciation of the vehicles. I assume here that if you rent out more units then you will have to transport more. If you are willing to assume that the gas expenditure is the same whether they have to transport to 1 location or several, i.e. if you are willing to assume that the gas expenditure (and depreciation) per mile is independent of distance, then you can assume constant marginal costs. I presume such an assumption is not strictly true for gas, but should be a good approximation for your purposes.  
> **username_0**: Exactly. I am however assuming that they only have X amount of scaffolding available to service X number of units - and they don't want to increase this. This means they have a limit on how many units they can work on. I am a little confused regarding the gas cost. If I assume a gas cost for each unit on USD 100 pr. unit, it will still cost USD 100 for the next unit, and the next unit etc. - thus making the marginal cost constant on USD 100. Is this a correct assumption?  
> **username_1**: That would be a correct assumption, but gas consumption by cars can vary depending on the distance and associated speed. If you get on the highway you might need less (or more) gas per mile than if you drive short distances within the city. It depends a bit on the car and its efficiency.  
> **username_0**: Yes, and that's where it gets a bit tricky. The way I understand, marginal cost is the extra cost associated with producing/servicing one more unit. (Q). So even if this company produces 100 units, compared to let's say 50 units, transportation cost would still be the AROUND same (USD 100). (In this assignment, I don't have access to accurate data regarding distance to sites etc.)  
> **username_1**: You understand marginal costs correctly. Are you saying that transportation costs are 100USD for producing 100 units and 50 units? In that case you do not have constant marginal costs, but rather decreasing marginal costs, because the first 50 units costs 100 USD but the next 50 units cost 0 USD. If the cost increase for extra units is constant, then you have constant MC. Another way to conceptualize constant MC is to say you have a linear cost function. If you can draw a straight line for your total costs as a function of output, then you have constant marginal costs. Otherwise you do not.  
> **username_0**: But a total cost function will never be a straight line? How can it be? If MC is constant at example USD100, the TC function will still be 100*Q*FC (where FC is fixed costs), meaning the total cost function will increase the more units you are selling.  
> **username_1**: The total cost function will increase, that's true. The line does not have to be flat, it can have a positive slope. But it mus be a line (no wiggles). Costs can go up with Q, but the cost function has to be able to be drawn perfectly from two points if MC is constant. Furthermore, the costs would not be how you describe. They would be 100Q + FC. In this case the slope is 100 and the MC is constant.  

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