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1. The price of strawberries is $4 a box. Three competitive strawberry farmers, Jones, Garcia and Kimura, face different cost conditions: Total Cost Boxes Jones MCJ Garcia MCG Kimura MCK 0 1 6 6 1 4 9 9 2 6 11 11 3 7 12 12 4 9 14 12.5 5 12 17 14 6 17 22 16.5 7 24 29 20 8 33 38 24.5 9 44 49 30 (a) For each farmer, calculate the marginal cost at each output level. (b) Describe in words the difference between the cost schedules of the three farmers. Who has the best technology? Why? (c) What are the profit-maximizing output levels of the three farmers, and what are their profits at those outputs? 2. Gas Guzzler Motors is one of three major auto producers. It is currently producing 6,000 cars a day, and selling them at a price of $10,000 each. Its marketing department tells it that its demand curve depends critically upon whether its competitors match its price changes. If they do not change their prices when GG does, schedule 1 will apply; if they match GG's price changes, schedule 2 will apply. The schedules are as follows: Cars (in 000's) 1 2 3 4 5 6 7 8 9 10 Schedule 1 Price per car $12,500 12,000 11,500 11,000 10,500 10,000 9,500 9,000 8,500 8,000 Schedule 2 Price per car $15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 (a) Calculate the marginal revenue (for increments of thousands of cars) associated with each demand schedule. (b) Draw the two demand and MR curves. (c) Assume now that, if GG raises its price, its competitors will not raise theirs, but that, if it lowers it price, they will match the price cuts. Show the effective demand curve and marginal revenue curve that face GG. 3. In the beach city of Santa Barbara, California, there are seven bathing suit stores, each with the same schedule of costs and each facing an identical demand curve. Swim N Style is a typical store: Suits sold (/hr.) 1 2 3 4 5 6 7 8 9 10 Price $68 66 64 62 60 58 56 54 52 50 Total Cost $70 80 85 90 100 115 136 164 200 245 TR MR MC AC (a) Calculate total revenue, marginal revenue, marginal cost and average cost at each level of sales for the store. (b) If Swim N Style is a profit maximizer, what number of suits will it sell per hour? What will its price and profit be? (c) How can you tell that the bathing suit market in Santa Barbara is not in long run equilibrium? What will happen because it is out of equilibrium? 4. Seventeen new bathing suit stores enter the Santa Barbara market, joining the seven that already existed. As a consequence, the demand schedule facing Swim N Style (and all other stores) falls, while the cost schedules remain constant as in Problem 1: Suits 1 2 3 4 5 6 7 8 9 10 (a) (b) (c) (d) (e) (f) (g) (h) Price $31.50 28.50 25.50 22.50 19.50 16.50 13.50 10.50 7.50 4.50 TR MR (and the costs are the same as before) What number of suits will Swim N Style sell now? What price will it charge, and what will its profit be? Is the market in long run equilibrium now? Why? What is the average cost per swimsuit sold? How many swimsuits are sold in Santa Barbara each hour and what is the total cost incurred? From your calculations in Problem 1, identify the sales level at which Swim N Style's average cost would be a minimum. What is this average cost? Suppose the number of swimsuits sold remained constant, but the number of stores was reduced so that each was operating at its point of minimum average cost. How many stores would be in operation? What would be the total costs of all the stores taken together? Compare this to your answer in (e) above. Summarize briefly what you have learned from this problem about the efficiency of monopolistic competition.