110_11s_SelectedQ_Ch14

# 110_11s_SelectedQ_Ch14 - Econ 110 Selected Questions From...

This preview shows pages 1–3. Sign up to view the full content.

1 Econ 110 Selected Questions From Chapter 14- MONOPOLISTIC COMPETITION 1. Sara is a dot.com entrepreneur who has established a Web site at which people can design and buy a sweatshirt. Sara pays \$1,000 a week for her Web server and Internet connection. The sweatshirts that her customers design are made to order by another firm, and Sara pays this firm \$20 a sweatshirt. Sara has no other costs. The table sets out the demand schedule for Sara’s sweatshirts. a. Calculate Sara’s profit-maximizing output, price, and economic profit. Sara produces the quantity that sets her marginal cost equal to her marginal revenue. Sara’s marginal cost is \$20. Between the quantity of 20 and 40 sweatshirts, Sara’s marginal revenue is \$40. Between 40 and 60 sweatshirts, Sara’s marginal revenue is \$0. So at the quantity of 40 sweatshirts Sara’s marginal revenue is \$20. To maximize her profit, Sara produces 40 sweatshirts. When Sara produces 40 sweatshirts, the price from the demand schedule is \$60 per sweatshirt. Sara’s total revenue is \$2,400. Her total cost is \$1,000 (fixed cost) plus \$800 (variable cost), or \$1,800. Sara’s economic profit equals \$2,400 \$1,800 or \$600. b. Do you expect other firms to enter the Web sweatshirt business and compete with Sara? Sara is making an economic profit so other firms will enter the Web sweatshirt business and compete with Sara. c. What happens to the demand for Sara’s sweatshirts in the long run? What happens to Sara’s economic profit in the long run? As new firms enter the Web sweatshirt industry, the demand for Sara’s sweatshirts will decrease. In the long run Sara’s economic profit is zero—a normal profit. 2. Figure 14.1 shows the situation facing Lite and Kool, Inc., a producer of running shoes. a. What quantity does Lite and Kool produce? To maximize profit, Lite and Kool produces the quantity at which marginal revenue equals marginal cost. Lite and Kool produces 100 pairs a week. b. What is the price of a pair of Lite and Kool shoes? To maximize profit, Lite and Kool charges the highest price that enables it to sell the 100 pairs of shoes, as read from the demand curve. Lite and Kool charges \$80 a pair. Price (dollars per sweatshirt) Quantity demanded (sweatshirts per week) 0 100 20 80 40 60 60 40 80 20 100 0

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document