110_11s_SelectedQ_Ch14

110_11s_SelectedQ_Ch14 - Econ 110 Selected Questions From...

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

View Full Document Right Arrow Icon
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
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 c. What is Lite and Kool’s economic profit or economic loss? Economic profit equals total revenue minus total cost. The price is $80 a pair and the quantity sold is 100 pairs, so total revenue is $8,000. Average total cost is $60 a pair, so total cost equals $6,000. Economic profit equals $8,000 minus $6,000, so Lite and Kool makes an economic profit of $2,000 a week. 3. In the market for running shoes, all the firms face a similar demand curve and have similar cost curves to those of Lite and Kool in problem 2. a.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/20/2011 for the course ECON 110 taught by Professor Po during the Spring '11 term at HKU.

Page1 / 12

110_11s_SelectedQ_Ch14 - Econ 110 Selected Questions From...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online