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UNIVERSITY OF TORONTO SCARBOROUGH DEPARTMENT OF MANAGEMENT ECMC02: Topics in Price Theory (Intermediate Microeconomics II) Problem Set-4 Pindyck et al . Chapter-12: 2, 3, 6, 8, 10, 11, 13. Supplemental: 1. The market for coffee at coffeehouses in GTA can be called monopolistically competitive since there are only a few sellers of a slightly differentiated product. This leaves each coffee shop with some market power. Below is shown T Coffee House’s cost curves and the demand curve TCH faces in the short run when positive economic profits are being made. a) Find and label the profit-maximizing price and quantity for TCH in Figure 1 with a p* and Q*. b) Shade in economic profits. c) Explain whether you expect these economic profits to persist in the long run and explain why. Figure 1 Price MC ATC MR D Quantity 2. Below is shown what TCH’s cost curves look like in the long run. a) Describe the adjustment process that must have occurred for this monopolistically competitive firm to reach long run equilibrium if in the short run the firm was making positive economic profits. In your description, be sure to explain which curves have shifted and which curves have not when compared to Figure 1 above where positive economic profits are being made in the short run. b) Monopolistically competitive markets are often called inefficient. Why?
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the short run making positive economic profits when compared to monopolistically competitive markets in the long run? Does society gain anything when monopolistically competitive markets move from short run equilibrium to long run equilibrium? Figure 2 MC Price ATC MR D Quantity 3. The restaurant industry in GTA, is monopolistically competitive, and NiceFood is a restaurant in this market. The figure below represents NF's short-run cost structure and the demand for NF’s food. a) What is the profit maximizing quantity for NF to produce? b) What is NF’s profit maximizing price? c) Calculate NF's short run profits. d) Given the characteristics of monopolistically competitive industries, how will NF's economic profits change in the long run? e) Assume that NF is operating on the most efficient scale of production in the short run, as are the other firms in the industry. Will there be more firms in the food industry in the long run? f) How would NF’s profits have changed in the long run if barriers prevented entry of new firms? g) What characteristics do monopolistically competitive and perfectly competitive firms share? h) What characteristics do monopolistically competitive firms and monopolies have in common?
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