Monopolistic Competition Calculations by mls18743


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									                    Unit Three Lesson 12 Activity One
                        Monopolistic Competition

Name: _____________________
Date: ______________________
Class: ______________________

8.   In the beach city of Santa Barbara, California, there are seven bathing suit
         stores, each with the same schedule of costs and each facing an identical
         demand curve. Swim N Style is a typical store:
                        Suits sold
                        (per hour)        Price       Total Cost
                             1             $68           $70
                             2              66            80
                             3              64            85
                             4              62            90
                             5              60           100
                             6              58           115
                             7              56           136
                             8              54           164
                             9              52           200
                            10              50           245
        a) Calculate total revenue, marginal revenue, marginal cost and average
           cost at each level of sales for the store.

        b) If Swim N Style is a profit maximizer, what number of suits will it sell
           per hour? What will its price and profit be?

        c) How can you tell that the bathing suit market in Santa Barbara is not in
           long- run equilibrium? What will happen because it is out of

  9.   Seventeen new bathing suit stores enter the Santa Barbara market, joining
       the seven that already existed. As a consequence, the demand schedule
       facing Swim N Style (and all other stores) falls, while the cost schedules
       remain constant as in Problem 8:

        Suits sold
        (per hour)         Price
           1               $31.50
           2                28.50
           3                25.50
           4                22.50
           5                19.50
           6                16.50
           7                13.50
           8                10.50
           9                 7.50
          10                 4.50
       a) What number of suits will Swim N Style sell now?_______________
       b) What price will it charge, and what will its profit be?_____________
       c) Is the market in long-run equilibrium now? Why?_______________
       d) What is the average cost per swimsuit sold?____________________
       e) How many swimsuits are sold in Santa Barbara each hour, and what is
           the total cost incurred?______________________________________
       f) From your calculations in Problem 1, identify the sales level at which
           Swim N Style’s average cost would be a minimum. What is this
           average cost?_____________________________________________
       g) Suppose the number of swimsuits sold remained constant, but the
           number of stores was reduced so that each was operating at its point of
           minimum average cost. How many stores would be in operation?
           What would be the total costs of all the stores taken together? Compare
           this to your answer in e) above.
       h) Summarize briefly what you have learned from this problem about the
           efficiency of monopolistic competition



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