Question

1.Suppose that a monopolistically competitive restaurant is currently serving 230 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to pay $12 per meal.

• What is the size of this firm’s profit or loss? Will there be entry or exit?
• Will this restaurant’s demand curve shift left or right?
• 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 $8. What is the size of the firm’s profit?
• Suppose that the allocatively efficient output level in long-run equilibrium is 200 meals. Is the dead-weight loss for this firm greater than or less than $60?

Answer 1

Answer 1 : Profit will be 12-10 = $2 per meal

Total profit will be $2 × 230 = $460 ,

There will be entry as there are supernormal profits.

Answer 2 : Resturant's demand curve will shift left as more firms will enter due to supernormal profits which will give customers more option to purchase meal from other firms so existinf firm's demand curve will shift leftward.

Answer 3 : Total revenue is 11 × 180 = 1980

Total cost will be 8 × 180 = 1440

Profit size of firm will be 1980 - 1440 = 540

Answer 4 : Dead weight loss will be greater than $60.

200 - 180 = 20

20 × 8 = 160.

Which is greater than 160

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