The following figure shows the demand curve, marginal revenue curve, and cost cu
ID: 1161709 • Letter: T
Question
The following figure shows the demand curve, marginal revenue curve, and cost curves of Cheap Tyme, Inc., a producer of athletic watches in monopolistic competition.
a) In the short run, what quantity does Cheap Tyme produce, what price does it charge, and does it make an economic profit?
b)In the short run, does Cheap Tyme have excess capacity and what is its markup?
c)Would firms enter the athletic watch market or exit from that market in the long run? Explain your answer.
FIGURE 17.1 Chapter Checkpoint Study Plan Problems 3 to 5 Price and cost (dollars per pair) MC 125 100 ATC 75 50 25 MR 100 200 300 400 Quantity (pairs per week)Explanation / Answer
A.A monopolist is in equilibrium when MR=MC.Equilibrium price is thus,75 and quantity is 200.
TR=p*q
TR=75*200=15,000
TC=AC*Q
AC=30
TC=30*200=6000
Profit=15000-6000=9,000
B.It doesn't seem that the firm has excess capacity.Excess capacity exists when the firm's produces less than the quantity at which ATC is minimum.In this case,the firm produces more output.ATC is minimum at output around 150.
Mark-up is the difference between MC and P
P=75 and MC=50
Mark-up=25.
C.The firms will exit the market in the long run because the existing firm in the short run is making profits.Attracted by it more firms will enter the market in the short run.Price will fall and firms will eventually start suffering from losses.Thus,in the long run firms will exit.
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