question archive Jackie's Jewelry was one of the first firms to produce toe rings in many colors and styles
Jackie's Jewelry was one of the first firms to produce toe rings in many colors and styles
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Jackie's Jewelry was one of the first firms to produce toe rings in many colors and styles. Suppose that other jewelry stores see that this trend is big and so they begin to sell toe rings also. This entry causes the demand for Jackie's toe rings to decrease. The tables below show the price, quantity, average cost and marginal cost for Jackie's Jewelry before and after the other stores enter the market. Find the profit-maximizing price and quantity in each situation, and show whether Jackie is making a profit or a loss in each situation. Assume that Jackie can only choose from the quantities of output given in the table. Which table shows the long-run equilibrium?
| Original Demand | |||||
|---|---|---|---|---|---|
| Price | Quantity | TC | AC | MC | MR |
| $30 | 1 | $20 | $20 | - | $30 |
| $20 | 2 | $25 | $12.5 | $5 | $10 |
| $12.5 | 3 | $33 | $11 | $8 | -$2.5 |
| $8 | 4 | $44 | $11 | $11 | -$5.5 |
| $5 | 5 | $60 | $12 | $16 | -$7 |
| New Demand (after other firms enter) | |||||
|---|---|---|---|---|---|
| Price | Quantity | TC | AC | MC | MR |
| $19 | 1 | $20 | $20 | - | $19 |
| $12.5 | 2 | $25 | $12.5 | $5 | $6 |
| $8 | 33 | $33 | $11 | $8 | -$1 |
| $5 | 4 | $44 | $11 | $11 | -$4 |
| $1 | 5 | $60 | $12 | $16 | -$15 |
A monopolistic competitor that produces and sells laser printers has the following information on cost and demand:
| Quantity (thousands) | Price | Total Revenue (Thousands) | Marginal Revenue | Total Cost (Thousands) | Marginal Cost | Average Cost |
|---|---|---|---|---|---|---|
| 0 | $120 | $0 | - | $130 | - | - |
| 1 | $110 | $110 | $110 | $165 | $35 | $165 |
| 2 | $100 | $200 | $90 | $210 | $35 | $165 |
| 3 | $90 | $270 | $70 | $270 | $60 | $90 |
| 4 | $80 | $320 | $50 | $345 | $75 | $86.25 |
| 5 | $70 | $350 | $30 | $430 | $85 | $86 |
| 6 | $60 | $360 | $10 | $530 | $100 | $88.33 |
| 7 | $50 | $350 | -$10 | $635 | $105 | $90.71 |
| 8 | $40 | $320 | -$30 | $745 | $110 | $93.13 |
| 9 | $30 | $270 | -$50 | $860 | $115 | $95.56 |
| 10 | $20 | $200 | -$70 | $1,000 | $140 | $100 |
What would be the price and quantity if this industry was perfectly competitive?
What rule will the monopolistic competitor user to determine the profit-maximizing price?
Will the outcome for the monopolistic competitor in the long run display productive efficiency?
Will the outcome for the monopolistic competitor in the long run display allocative efficiency?
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| Original Demand | |||||
|---|---|---|---|---|---|
| Price | Quantity | TC | AC | MC | MR |
| $30 | 1 | $20 | $20 | - | $30 |
| $20 | 2 | $25 | $12.5 | $5 | $10 |
| $12.5 | 3 | $33 | $11 | $8 | -$2.5 |
| $8 | 4 | $44 | $11 | $11 | -$5.5 |
| $5 | 5 | $60 | $12 | $16 | -$7 |
| P | Q | TR | TC | PROFIT |
|---|---|---|---|---|
| 30 | 1 | 30 | 20 | 10 |
| 20 | 2 | 40 | 25 | 15 |
| 12.5 | 3 | 37.5 | 33 | 4.5 |
| 8 | 4 | 32 | 44 | -12 |
| 5 | 5 | 25 | 60 | -35 |
Here firm's profit is maximized at 15 when quantity is 2 and price is 20.
| New Demand (after other firms enter) | |||||
|---|---|---|---|---|---|
| Price | Quantity | TC | AC | MC | MR |
| $19 | 1 | $20 | $20 | - | $19 |
| $12.5 | 2 | $25 | $12.5 | $5 | $6 |
| $8 | 33 | $33 | $11 | $8 | -$1 |
| $5 | 4 | $44 | $11 | $11 | -$4 |
| $1 | 5 | $60 | $12 | $16 | -$15 |
| P | Q | TR | TC | PROFIT |
|---|---|---|---|---|
| 19 | 1 | 19 | 20 | -1 |
| 12.5 | 2 | 25 | 25 | 0 |
| 8 | 3 | 24 | 33 | -7 |
| 5 | 4 | 20 | 100 | -80 |
| 1 | 5 | 5 | 60 | -55 |
Here firm loss is minimized when price is 12.5 and quantity is 2. This is a case of the long run because the price is equal to the average cost.
A monopolistic competitor that produces and sells laser printers has the following information on cost and demand:
| Quantity (thousands) | Price | Total Revenue (Thousands) | Marginal Revenue | Total Cost (Thousands) | Marginal Cost | Average Cost |
|---|---|---|---|---|---|---|
| 0 | $120 | $0 | - | $130 | - | - |
| 1 | $110 | $110 | $110 | $165 | $35 | $165 |
| 2 | $100 | $200 | $90 | $210 | $35 | $165 |
| 3 | $90 | $270 | $70 | $270 | $60 | $90 |
| 4 | $80 | $320 | $50 | $345 | $75 | $86.25 |
| 5 | $70 | $350 | $30 | $430 | $85 | $86 |
| 6 | $60 | $360 | $10 | $530 | $100 | $88.33 |
| 7 | $50 | $350 | -$10 | $635 | $105 | $90.71 |
| 8 | $40 | $320 | -$30 | $745 | $110 | $93.13 |
| 9 | $30 | $270 | -$50 | $860 | $115 | $95.56 |
| 10 | $20 | $200 | -$70 | $1,000 | $140 | $100 |
What would be the price and quantity if this industry was perfectly competitive?
Under perfect competition, profit is maximized where the difference between total revenue and the total cost is maximum. It economic profit is maximum at quantity 3 and price $90. Here at this point economic profit is zero. (total revenue - total cost= 270 -270).
What rule will the monopolistic competitor user to determine the profit-maximizing price?
The profit-maximizing price for the monopolistic competitor occurs where marginal revenue is equal to the marginal cost.
Will the outcome for the monopolistic competitor in the long run display productive efficiency?
No, The outcome for the monopolistic competition, in the long run, does not display productive efficiency because monopolistic firm operate already at the excess level and firm's profit-maximizing output is less than the firms' minimum average output.
Will the outcome for the monopolistic competitor in the long run display allocative efficiency?
No, The outcome for the monopolistic competition, in the long run, does not display allocative efficiency because firm's price is more than the marginal cost. And allocative efficiency occurs where marginal cost is equal to the price.
