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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.