Suppose that a monopolistically competitive restaurant is currently serving 240

Question

Suppose that a monopolistically competitive restaurant is currently serving 240 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.

Instructions: Enter your answers as whole numbers.

a. What is the size of this firm’s profit or loss? $.

b. Will there be entry or exit?  (Click to select)EntryExit.      

Will this restaurant’s demand curve shift left or right?  (Click to select)LeftRight.

c. Assume that the allocatively efficient output level in long-run equilibrium is 200 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 200 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 $60? (Click to select)Greater thanLess than

Explanation / Answer

(a) Profit = Output x (Price - ATC) = 240 x $(12 - 10) = 240 x $2 = $480

(b) Entry

Since entry or exit is free in monopolistic competition, positive short run profit will attract new entry.

Demand curve for individual restaurants will shift to the left.

(c) $0

In long run equilibrium, price equals ATC for every firm and economic profit is zero.

(d) Less than $60

Deadweight loss = (1/2) x $(11 - 8) x (200 - 180) = (1/2) x $3 x 20 = $30

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