Question

Parveen restrings tennis racquets. Her fixed costs are $1,000/month, and it costs her $15 of labour to string one racquet. The table below shows the demand schedule for Parveen's Restringing Services.

price	quantity
25	0
20	10
15	20
10	30
5	40
0	50

a) Calculate Parveen's profit-maximizing price, output, price and economic profit, show your work with a chart (8 points) b) Do you expect other firms to enter the tennis racquet restringing business and compete with Parveen? (2 pts) Why or why not? (2 pts) c) What will happen to demand for Parveen's restringing services in the long run? (4 pts) d) What happens to Parveen's economic profit in the long run? (4 pts)

Answer 1

A) MC of Parveen=15$

Monopolistic competition equilibrium at MR= MC or MAXIMUM quantity at which MR>MC.

So at q=10, MR=200/10=20( MR>MC)

At Q=20, MR=100/10=10( MR<MC)

So Parveen will sell 10 units to maximize profit.

And the price=20$

Profit={20-15)*10-1000=-950( loss)

B) Because Parveen is earning negitive Profit ,so no new firms will enter the market, instead some existing firms will exit the market.

C) Due to exiting of some existing firms, market share of Parveen will increase , so his good Demand will increase in long run.

D) In long run Parveen profit will increase from negitive to zero economic profit,so that no new firm will enter or no existing firm will exit the market.