CASE STUDY ASSIGNMENT: MONOPOLISTIC COMPETITION In the beach city of Santa Barba
ID: 1102859 • Letter: C
Question
CASE STUDY ASSIGNMENT: MONOPOLISTIC COMPETITION
In the beach city of Santa Barbara, California, there are seven bathing suit stores that provide service to beach going customers. Each of the stores vigorously compete with each other and they are faced with the same schedule of costs. Additionally, each of the store faces an identical bathing suit demand curve in the Santa Barbara market. Swim N Style is a typical store out of those seven and it faces the following demand and cost schedule.
Suits sold (per hour)
Price
Total Cost
1
$68
$70
2
$66
$80
3
$64
$85
4
$62
$90
5
$60
$100
6
$58
$115
7
$56
$136
8
$54
$164
9
$52
$200
10
$50
$245
What is the average cost per swimsuit now sold? Show the detailed calculations and explain the reason.
How many swimsuits are now sold in Santa Barbara each hour under increased competition, and what is the total cost incurred? Show the detailed calculations and explain the reason.
Suppose the number of swimsuits sold remained constant under the increased competition, but the number of stores was reduced so that each was operating at its point of minimum average cost. How many stores would now be in operation? Why? Show the detailed calculations and explain the reason.
Now that few stores have closed, what would be the total costs of all the remaining stores taken together? Compare this to your answer when all the stores were in operation. Show the detailed calculations and explain the reason for difference/similarity.
Suits sold (per hour)
Price
Total Cost
1
$68
$70
2
$66
$80
3
$64
$85
4
$62
$90
5
$60
$100
6
$58
$115
7
$56
$136
8
$54
$164
9
$52
$200
10
$50
$245
UPDATED DEMAND SCHEDULE Suits sold (per hour) Price $31.50 $28.50 $25.50 $22.50 $19.50 $16.50 $13.50 $10.50 $7.50 $4.50 2 3 4 5 6 8 9 10Explanation / Answer
Find the total revenue and marginal revenue, marginal cost and average cost and profit with the new updated demand curve. ATC = TC/Q and TR = P x Q.
ATC is shown in the table above. ATC = TC/Q. What is the average cost per swimsuit now sold?
How many swimsuits are now sold in Santa Barbara each hour under increased competition, and what is the total cost incurred?
Note that monopolistic competition must have MR = MC. MR should be closest to MC. Profits are zero and MR is closest to MC when Q = 4. This is required sales and total cost is $90. Total demand is 4*7 = 28 suits
Suppose the number of swimsuits sold remained constant under the increased competition, but the number of stores was reduced so that each was operating at its point of minimum average cost. How many stores would now be in operation? Why?
At the minimum efficient scale, (minimum ATC), each firm produces 6 suits when its ATC is minimized at 19.2. The demand is 28 units so now there are 28/6 = 4.66 or 4 firms.
Now that few stores have closed, what would be the total costs of all the remaining stores taken together? Compare this to your answer when all the stores were in operation.
Total cost at Q = 6, is 115 and total cost of all firms is 115*4 = 460. Before this, total cost of all firms was 90*7 = 630. Cost is reduced because few firms have left the market and so each firm has been operating at minimum cost per unit.
Q Price TR TC MR MC ATC Profit 1 31.5 32 70 32 70 70.0 -39 2 28.5 57 80 26 10 40.0 -23 3 25.5 77 85 20 5 28.3 -9 4 22.5 90 90 14 5 22.5 0 5 19.5 98 100 8 10 20.0 -3 6 16.5 99 115 2 15 19.2 -16 7 13.5 95 136 -5 21 19.4 -42 8 10.5 84 164 -11 28 20.5 -80 9 7.5 68 200 -17 36 22.2 -133 10 4.5 45 245 -23 45 24.5 -200Related Questions
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