In the beach city of Santa Barbara, California, there are seven bathing suit sto
ID: 2440952 • Letter: I
Question
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.
1
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.
1. Calculate the new total revenue, average revenue, and marginal revenue at each level of sales for the store under increased competition.
2. What number of suits will Swim N Style sell now? Why? Show the detail calculations and explain the reason.
3. What price will Swim N Style now charge? Why? Show the detail calculations and explain the reason.
4. What will its profit be under the increased competition? Show the detail calculations and explain the reason.
5. Is the market in long-run equilibrium now? Why? Clearly explain the reason.
6. What is the average cost per swimsuit now sold? Show the detailed calculations and explain the reason.
7. 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.
8. 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.
9. 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.
10. Summarize what you have learned from this case about the efficiency of monopolistic competition.
suit sold price TC TR MR MC AC1
68 70 68 68 70 70.00 2 66 80 132 64 10 40.00 3 64 85 192 60 5 28.33 4 62 90 248 56 5 22.50 5 60 100 300 52 10 20.00 6 58 115 348 48 15 19.17 7 56 136 392 44 21 19.43 8 54 164 432 40 28 20.50 9 52 200 468 36 36 22.22 10 50 245 500 32 45 24.50Explanation / Answer
(1).
(2). Swim n suits will sell 4 units now. Because at this point total revenue is equal to total cost (TR=TC)
(3) It will charge $22.50 now, because here market is in equilibrium
(4) Its profit is 0. As market is in equilibrium so there is no profit and no loss.
(5) Yes, market is in equilibrium now, because firms are making zero economic profit
suits sold price TR MR AR 1 31.50 31.50 31.50 31.50 2 28.50 57 25.50 28.50 3 25.50 76.50 19.50 25.50 4 22.50 90 13.50 22.50 5 19.50 97.50 7.50 19.50 6 16.50 99 1.50 16.50 7 13.50 94.50 -4.50 13.50 8 10.50 84 -10.50 10.50 9 7.50 67.5 -16.50 7.50 10 4.50 45 -22.50 4.50Related Questions
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