CASE STUDY ASSIGNMENT: MONOPOLISTIC COMPETITION In the beach city of Santa Barba
ID: 1103689 • 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
ONLY ROUND TO TWO DECIMAL PLACES (e.i. 12.49 >12.50)
1)Draw a table and calculate total revenue, average revenue, marginal revenue, marginal cost, and average cost at each level of sales for the store.
2)If Swim N Style is a profit maximizer, what number of suits will it sell per hour? What will its price and profit be? Show the detailed calculations and explain the reason.
3)How many swimsuits are currently sold in the Santa Barbara market each hour, and what is the total cost incurred? Show the detailed calculations and explain the reason.
4)Identify the sales level at which Swim N Style’s average cost would be a minimum. What is this average cost? Show the detailed calculations and explain the reason.
5)How can you tell that the bathing suit market in Santa Barbara is not in long-run equilibrium? Clearly explain the reason. What will happen because it is out of equilibrium? A recent marketing survey shows that the Santa Barbara exhibits a high growth in bathing suit market. Consequently, seventeen new bathing suit stores now enter the market, joining the seven that already existed. Therefore, the demand schedule facing Swim N Style (and all other stores) falls, while the cost schedules for both old and new stores remain constant.
The following represents the new demand schedule.
UPDATED DEMAND SCHEDULE Suits sold (per hour)
Price 1 $31.50
2 $28.50
3 $25.50
4 $22.50
5 $19.50
6 $16.50
7 $13.50
8 $10.50
9 $7.50
10 $4.50
6)Calculate the new total revenue, average revenue, and marginal revenue at each level of sales for the store under increased competition. 7)What number of suits will Swim N Style sell now? Why? Show the detail calculations and explain the reason.
8)What price will Swim N Style now charge? Why? Show the detail calculations and explain the reason.
9)What will its profit be under the increased competition? Show the detail calculations and explain the reason.
10)Is the market in long-run equilibrium now? Why? Clearly explain the reason.
11)What is the average cost per swimsuit now sold? Show the detailed calculations and explain the reason.
12)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.
13)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.
14)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.
15)Summarize what you have learned from this case about the efficiency of monopolistic competition.
Explanation / Answer
Sale(Q) Price Total Cost TR AR MR AC MC 1 $68 $70 $68 $68 $70 2 $66 $80 $132 $66 $64 $40 $10 3 $64 $85 $192 $64 $60 $28 $5 4 $62 $90 $248 $62 $56 $23 $5 5 $60 $100 $300 $60 $52 $20 $10 6 $58 $115 $348 $58 $48 $19 $15 7 $56 $136 $392 $56 $44 $19 $21 8 $54 $164 $432 $54 $40 $21 $28 9 $52 $200 $468 $52 $36 $22 $36 10 $50 $245 $500 $50 $32 $25 $45 Use TR = P*sales(Q) AR = TR/Sales(Q) MR = TR(Q)-TR(Q-1) AC = TC/Q 20 Profit maximizer charges MR = MC This is at Q = 9 P = 52 3) Q = 9 swimsuit sold per hour Cost = $200 4) When Average cost is minimmum Q = 6 or 7
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