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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?

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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.

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  • $\begingroup$ 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) $\endgroup$ – oliverbj Apr 26 '18 at 12:29
  • $\begingroup$ 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. $\endgroup$ – BB King Apr 26 '18 at 12:41
  • $\begingroup$ 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? $\endgroup$ – oliverbj Apr 26 '18 at 13:16
  • $\begingroup$ 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. $\endgroup$ – BB King Apr 26 '18 at 13:56
  • $\begingroup$ 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.) $\endgroup$ – oliverbj Apr 26 '18 at 14:04

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