Question

Please answer D

c) Nike researchers have developed a new type of running shoe that provides more support for peoples’ ankles and knees while running. Draw a diagram to show what happens to the market for Nike’s running shoes, assuming the Nike was initially making a normal profit. d) Explain, with the aid of a diagram, what would happen to Nike’s market share in the long run following the events in part (c) above

d) Explain, with the aid of a diagram, what would happen to Nike’s market share in the long run following the events in part (c) above.

Answer 1

C) Nike works in monopolistics competition which means there are larege number of sellers selling the same product i.e. shoes but with product differentiation i.e. different features, shapes, sizes etc. of the product.

With the introduction of new shoes in the market by Nike, it would be able to earn super- normal profit means more than normal profit. It would be so because people would prefer to buy such shoes which are creating utility to them i.e. comfort. Nike will grab the market share with such shoes and will earn super-normal profit. Such profit in monopolistic competition can be shown with following diagram:

where, MC= Marginal Cost

AC=Average Cost

MR= Marginal Revenue

AR= Average Revenue

P= Price

Q= Quantity

Here, Nike will earn super-normal profit to the portion of shaded area RPES because :

1. When the price of product is OP, quantity sold is OQ and cost is OR. So the Total Revenue is= OP×OQ=OPEQ

2. Whereas Total Cost is OR×OQ=ORSQ. Therefore, profit is OPEQ-ORSQ=RPES which means NIKE will earn super-normal profit i.e. Revenue is more than Cost.

D) In the long run, Nike would only earn normal profits and not super-normal profits. It is because Nike operates in monopolistic competition where new firms can easily enter the market. Super-normal profit will drive the new firms to enter the market, so the excessive profit would be shared by the new firms in the market and Nike would only earn normal profit in the long run. It could be understood with the following diagram:Here, the Price of the product is OP at the Output OQ and the Cost is OP. Therefore, both Avereage cost and Average revenue are intersecting at point E, which means firms will earn only such profit that will cover their cost i.e. normal profits.