Question

Suppose the monopolistically competitive barber shop industry in a community is in long-run equilibrium, and that the typical price is $20 per haircut. Moreover, the population is rising.

a.  Illustrate the short-run effects of a change on the price and output of a typical firm in the market.

b. Show what happens in the long run. Will the final price be higher than $20? Equal $20? Be less than $20? Assume that nothing happens to the cost of producing haircuts.

c. Suppose that, initially, the price of a typical children’s haircut is $10. Do you think this represents price discrimination? Why or why not?

Can you please answer this through a graph and movement in curves.

Answer 1

Suppose the monopolistically competitive barber shop industry in a community is in long-run equilibrium, and that the typical price is $20 per haircut. If the population is rising, this means that the demand for haircut will increase, this increase in demand for haircut shifts the demand curve upward.

a. the short-run effects of a change on the price and output of a typical firm in the market can be seen from the following diagram.

In the short run with increase in demand since supply cant be increased so the price increases to P1 and hence there is economic profit.

b. Since it is a monopolistically competitive industry so there is no or very little barriers of entry and exit. Since the firms are making economic profit so new firms will enter the market in the long-run and hence initial equilibrium price will be restored at $20 because of an increase in supply.

c. Suppose that, initially, the price of a typical children’s haircut is $10, I think that this is some short of price discrimination as we know price discrimination is the act of charging different prices from different customers for similar type of goods or service on different basis. So here haircut is almost similar for an adult or a child it doesn't have much difference, so this is one type of price discrimination.