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Homework answers / question archive / Suppose that a monopolistically competitive restaurant is currently serving 260 meals per day (the output where MR = MC)

Suppose that a monopolistically competitive restaurant is currently serving 260 meals per day (the output where MR = MC)

Economics

Suppose that a monopolistically competitive restaurant is currently serving 260 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to pay $13 per meal. Enter your answers as whole numbers.

a. What is the size of this firm's profit or loss? $

b. Will there be entry or exit?. Will this restaurant's demand curve shift left or right?

c. Assume that the allocatively efficient output level in long-run equilibrium is 210 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $9. What is the size of the firm's profit? $

d. Suppose that the allocatively efficient output level in long-run equilibrium is 210 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $9. Is the deadweight loss for this firm greater than or less than $60? 

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Answer:

a) Profit = (Consumer WTP - ATC) x quantity = (13-10) x 260 = $780

b) There will be entry of firms because of the profit (economic) earning opportunity

Restaurant's demand curve would shift towards the left as more competitors enter the market and profits are driven to zero.

c) In the long run equillibrium, the profit earned must be zero as demand curve shifts such that ATC = P in the long term at the profit maximizing point.

d) Deadweight loss = (Price charged - MC) x 0.5 x (Allocatively efficient output - firm's output)

DWL = 0.5 x (11-9) x (210 - 180) = $30

DWL is less than $60

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