Question

Part A) You know that you are operating in a monopolistically competitive market, that is, you are a small part of a large market with many competitors in this market. From data collected on the Widget Market, you know that market demand has recently increased and market supply has recently decreased. Name two shift factors and determinants that could have caused the market demand to increase and two shift factors and determinants that could have caused the market supply to decrease. Also as manager of the facility, what decisions should you make regarding production levels and pricing for your Widget facility? (15 points)

Remember that supply and demand are about the market supply and market demand, which is much bigger than your own company. You are being given data on supply and demand for the whole market and are being asked what effect that has on you as a small part of that market. You want to identify the possible change in market equilibrium price and possible change in market equilibrium quantity based on the shifts in demand and supply and adjust your own price and quantity to match the market.


(Part B) Now, suppose that the following changes in demand and supply occur: (1) a complimentary good goes up in price and (2) your costs of production decrease. What decisions will you make regarding production levels and pricing for your Widget facility based ONLY on these changes, for example, do not factor in the changes in part (a) here? (15 points)

Answer 1

a) The two possible factors that increase the market demand of widget might be - i) an increase in the income of the people and ii) reduction of price of the widget .

The two possible factor that decrease the market supply might be - i) decrease in the price of the widget and ii) many firms exit the industry .

as a manager, we know the price of widget is low , therefore we can only produce the level of output which can cover the all the variable cost and total cost and sells at the price or in other words, produce the output where we earn ecnomic profit or profit is equal to zero . because , if we charge the price higher, the gain some profit , the new firms will enter the industry and profit will come back to zero or even we can suffer loss.

B) 1) a ) when complimentray good goes up price, then the demand for the other good will increases and hence therefore we can increase the supply of the widget to earn maximum profits and 2) when the cost of production decrease, we can increase the supply of widget to that level which keep the price same to maximize the profits otherwise large increase in the supply cause the price level to fall which decrease the profits .