Suppose that a monopolistically competitive restaurant is currently serving 280

Question

Suppose that a monopolistically competitive restaurant is currently serving 280 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to pay $12 per meal. a.What is the size of this firm's profit or loss? $ b.Will there be entry or exit? Will this restaurant's demand curve shift left or right? c.Assume that the allocatively efficient output level in long-run equilibrium is 220 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $8. What is the size of the firm's profit? $ d.Suppose that the allocatively efficient output level in long-run equilibrium is 220 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $8. Is the deadweight loss for this firm greater than or less than $120?

Explanation / Answer

At MR=MC, Q=280
ATC=10
TC=ATC*Q
=10*280
=2800
Willingness to pay=$12
TR=P.Q
=12*280
=3360
Profit=TR-TC
=3360-2800
=560

Since, the positive economic profits exist there will b entry of firms.

Shift to right

In the long run the firm will be earning 0 profits.

Difference=11-8=3
for 220-180=40 units
3*40=120.But with MC rising for all these units and demand curve falling,the deadweight loss would be smaller.

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