Question

Dumphy and Funke are rival tattoo artists in the small town of Feline. There are no other tattoo artists in town. It costs $30 to produce a Tweety Bird tattoo. Assume for simplicity that fixed costs are zero and that Dumphy and Funke perform identical work. For a while, there was too much demand for Funke and Dumphy to handle and they both charged $200 for a tatoo. But recently, demand has dropped significantly and there isn't enough work for both to fill their days at any price. However, there is some demand at all prices.a. What will be the equilabrium price that Dumphy and Funke will charge?b. What are the profits for Dumphy and Funke at the equilibrium price?c. What type of competition would Funke and Dumphy likely engage in after the decrease in demand?

Answer 1

Answer:

Part a:  What will be the equilabrium price that Dumphy and Funke will charge?

Answer: Price charged = $30

Part b: What are the profits for Dumphy and Funke at the equilibrium price?

Answer: Profit on equilibrium price = $0

Part c: What type of competition would Funke and Dumphy likely engage in after the decrease in demand?

Answer: Price competition

Explanation:

Part a:  What will be the equilabrium price that Dumphy and Funke will charge?

Answer:

Price charged by each of the artists will be equal to their marginal cost.

Thus, equilibrium P = MC = $30.

Part b: What are the profits for Dumphy and Funke at the equilibrium price?

Answer:

Equilibrium profits will be 0 at the equilibrium because price charged is equal to MC, leading to no profits.

Part c: What type of competition would Funke and Dumphy likely engage in after the decrease in demand?

Answer:

Price competition - as changes in price will lead to changes in demand and thus sales