In the beach city of Santa Barbara, California, there are seven bathing suit sto
ID: 2440998 • 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)
Total revenue (TR) = Price (P) x Quantity (Q)
Average revenue = TR / Q = Price
Marginal revenue (MR) = Change in TR / Change in Q, computed as follows.
(2)
Profit is maximized (or loss is maximized) when MR = MC as long as MR > 0. If the equality does not hold, the output corresponds to the values of MR and MC when MR > MC. From the tables, when Q = 4, MR > MC (= $13.5 > $5) but when Q = 5, MR < MC ($7.5 < $10). Therefore, profit-maximizing (loss-minimizing) quantity is 4 units.
(3)
When quantity is 4 units, corresponding price = $22.5
(4)
When quantity is 4 units, corresponding profit = 0. This is the loss-minimizing level.
NOTE: As per Chegg Answering Policy, first 4 parts are answered.
Q P = AR ($) TR ($) MR ($) TC ($) MC ($) Profit ($) = TR - TC 1 31.5 31.5 31.5 70 70 -38.5 2 28.5 57 25.5 80 10 -23 3 25.5 76.5 19.5 85 5 -8.5 4 22.5 90 13.5 90 5 0 5 19.5 97.5 7.5 100 10 -2.5 6 16.5 99 1.5 115 15 -16 7 13.5 94.5 -4.5 136 21 -41.5 8 10.5 84 -10.5 164 28 -80 9 7.5 67.5 -16.5 200 36 -132.5 10 4.5 45 -22.5 245 45 -200Related Questions
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