Question

Suppose that a monopolistically competitive restaurant is currently serving 250 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. Assume that the allocatively efficient output level in long-run equilibrium is 210 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 profit? $.

d. Suppose that the allocatively efficient output level in long-run equilibrium is 210 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 $60?

Answer 1

When MR=MC , output= 250 meals per day.

At that output level , ATC = $10 per meal.

And P= $13 per meal.

(a) Because P>ATC . This implies that the restaurant is earning profit. Restaurant's profit per meal = $(13-10) = $3 .

And the restaurant sells 250 meals at this price , profit = $(3)(250) = $ 750.

(b) Given that this restaurant is making an economic profit , then more firms will enter in this industry , since other firms will try to earn profits. Entry of new firms will reduce demand for the restaurant causing its demand curve to shift to the left.

(c) Allocative efficient level of output in long run equilibrium = 210 meals.

In long run equilibrium , suppose that this restaurant charges $11 per meal for 180 meals and MC of 180th meal is $9.

In the long run ,P=minimum ATC , and therefore, the economic profit in the long run is always zero.

(d) Deadweight loss will be less than $60 - since the upper bound is $60 because even if the $2 per unit difference between marginal benefit as given by the demand curve ($11) and marginal cost as given by MC curve ($9) continued for all units between 180th and 210th meal , the deaweight loss would only be $(2)(210-180)= $60.

But MC is rising and demand curve falling , therefore, the deadweight loss would have to be smaller. As a result, deadweight loss for this firm would be less than $60.