Question

Suppose you manage a local grocery store and yo have learn that a popular national grocery chain is about to open a store in your town a few miles away. Use model of monopolistic competition to analyze the impact of this new store on quantity of output should produce and your store should charge . Explain how opening of this new store affect your business, be asure to address what happen to your customers, supply demand and prices. what will happen to your profiyts. show graphically and explain reasoning in detail

Answer 1

Consider the given problem, here the “D1” be the initial demand schedule face by the grocery, => the corresponding marginal revenue schedule is MR1 and “MC=AC=c” be the marginal as well as average cost of the grocery. So, as a monopolistic competitive firm it try to maximize its profit by using condition “MR1=MC”. So, the profit maximizing production is Q1 and the corresponding price P1. The level of profit earn by the monopolistic competitive firm is P1A1E1C.

Now, the opening of the new store will definitely reduce the market share of the monopolistic competitive firm, => the demand schedule faced by the monopolistic competitive firm reduced to “D2”, => the corresponding marginal revenue schedule is MR2, but the MC and AC remains same. So, the new profit maximizing level of production is Q2 below the Q1. The new price is P2 less than P1.

So, as the new store opens its production decreases and the level of profit decreases to “P2A2E2C”.