Question

Suppose that a monopolistically competitive restaurant is currently serving 240 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. Instructions: 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. Suppose that the allocatively efficient output level in long-run equilibrium is 200 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 economic profit? d. Suppose that the allocatively efficient output level in long-run equilibrium is 200 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 $40?

Answer 1

Answer:

The restaurant's profit per meal= consumers WTP for per meal - ATC per meal = $13 - $10 = $3

Given that restaurants sells 240 meals per day at this price the profit is

= $3 * 240 = $720    

A) The size of the firms profit is $ 720.

B) As it can be seen that firm is making profit so there will be an entry into the industry since the other firms will try to capture some of the economic profit.

Also, the entry of other firms will reduce the demand for the restaurant which will lead the demand curve to shift to the left.

C) Now, the allocative efficient output level in long-run equilibrium is 200 meals. In the long-run, restaurant charges $11 per meal for 180 meal and the marginal cost of 180th meal is $9.

Thus, the size of the economic profits in the long run is always zero in monopolistic competitive market.

D) The dead-weight loss for the firm is exactly equal to $40 because the difference between the Marginal Benefit as given by the demand curve i.e., $11 and the Marginal Cost as given by the MC curve is $9, so the difference is equal to $2 ($11 - $9) for all the units between 180th and 200th.

Thus, the dead-weight loss is = $2 * (200-180)

= $2 * 20

= $40

Hence the dead-weight loss is $40.