In the beach city of Santa Barbara, California, there are seven bathing suit sto
ID: 2441084 • 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. 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.
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.
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 -200Explanation / Answer
e(Q) Price Total Cost TR AR MR AC MC
1 $68 $70 $68 $68 $70
2 $66 $80 $132 $66 $64 $40 $10
3 $64 $85 $192 $64 $60 $28 $5
4 $62 $90 $248 $62 $56 $23 $5
5 $60 $100 $300 $60 $52 $20 $10
6 $58 $115 $348 $58 $48 $19 $15
7 $56 $136 $392 $56 $44 $19 $21
8 $54 $164 $432 $54 $40 $21 $28
9 $52 $200 $468 $52 $36 $22 $36
10 $50 $245 $500 $50 $32 $25 $45
Use TR = P*sales(Q)
AR = TR/Sales(Q)
MR = TR(Q)-TR(Q-1)
AC = TC/Q
20 Profit maximizer charges MR = MC
This is at Q = 9
P = 52
3) Q = 9 swimsuit sold per hour
Cost = $200
4) When Average cost is minimmum Q = 6 or 7
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