Charles's Ridiculously Long Monopolistically Competitive FRQ

Charles's Ridiculously Long 

Monopolistically Competitive FRQ

Charles’s Taco Emporium is one of many portable taquerias in the area of Phoenix AZ. Each of these taco trucks produces a slightly differentiated product (Charles’s famous Flaming Sphincter Tacos are his best selling tacos), there are no barriers to entry or exit, and the firm is in long-run equilibrium.

A.   List and explain each of the characteristics of a monopolistically competitive firm.

B.    Draw a graph and compare the Monopolistically Competitive firm in Long-Run equilibrium to a Monopoly and a Perfectly Competitive Firm. Explaining clearly the types of profits all 3 firms would make in the long run.

C.    Draw two separate graphs of the Monopolistically Competitive firm making a loss (Negative Profit) and positive profits ensuring that you show (Shade) the area of losses and profits.

D.   What must be true for the monopolistically competitive firm to continue to produce at a loss?

E.    At the profit-maximizing price would the monopolistically competitive firms demand be inelastic, elastic or unit elastic? Explain.

F.    Does the Monopolistically Competitive Firm produce the allocatively efficient quantity in the long run? Explain.

G.   Does the Monopolistically Competitive Firm produce the productively efficient quantity in the long run? Explain.

H.   Assume there is a Lump Sum tax imposed on all taco trucks in the Phoenix area how would this lump sum tax affect the price and quantity of tacos produced by Charles’s taco truck. How would it affect Charles’s profits or losses?

I.      Assume there is a Per-Unit tax imposed on all taco trucks in the Phoenix area how would this per unit tax affect the price and quantity of tacos produced by Charles’s taco truck. How would it affect Charles profits or losses?

J.     Assume instead that the price for a license for taco trucks (a fixed cost) increases, how does this affect the price and quantity of tacos produced by Charles’s taco truck. How would it affect Charles profits or losses and specifically speak to what curve will shift and the direction of shift.

K.   Charles is making positive economic profits in the short-run. Relative to this short run scenario, what happens to the following in the long run? Explain clearly what happens to the Demand and MR curves.

a.     The number of firms in the market (industry)

b.     The price in the market (industry)

c.     The quantity produced in the market (industry)

d.     The price of Charles’s Tacos

e.     The quantity produced by Charles’s Tacos

L.    Now assume the demand for tacos increases what happens to the price and quantity of Charles’s tacos.

M.  Draw a graph of Charles’s tacos making positive economic profits and label the quantity where revenue would be maximized. Labeled Qt.

N.   Now assume that the City of Phoenix has increased the minimum wage that Charles pays his workers. How would this increase in the minimum wage (a variable cost) affect the price and quantity of tacos produced by Charles? Explain using a graph shifting the appropriate curves.

O.   When firms enter the taco industry in the long run explain what happens to the demand and marginal revenue curve of Charles’s taco truck.

P.    When firms exit the taco industry in the long run explain what happens to the demand and marginal revenue curve of Charles’s taco truck.

Q.   Do forms in this industry experience economies of scale, diseconomies of scale, or neither in the long run? Explain.

R.    What activity could Charles engage if he wanted to cause the demand for his tacos to become more inelastic? Explain.

S.     If Firms enter the Taco market would the demand curve for Charles’s Tacos become more elastic, inelastic, or neither? Explain.

A.   List and explain each of the characteristics of a monopolistically competitive firm.

Slightly Differentiated - Different varieties of choices

No Barriers to Entry - Anyone can enter or leave this industry

Price Takers - Firms have some price making ability

Many Firms - there are a large amount of firms 

Advertising - Firms can advertise to cause the demand for their goods to be more inelastic

B.    Draw a graph and compare the Monopolistically Competitive firm in Long-Run equilibrium to a Perfectly Competitive Firm. Explaining clearly the types of profits all firms would make in the long run.

The monopolistically comp firm and the perfectly comp firm both have their P = ATC
Both ATC's are tangent to the price
but the perfectly competitive firm produces a
larger quantity at a lower price that the monopolistically comp firm
both firms would be making zero economic profits 
also called a normal profit

C.    Draw two separate graphs of the Monopolistically Competitive firm making a loss (Negative Profit) and positive profits ensuring that you show (Shade) the area of losses and profits.

 

D.   What must be true for the monopolistically competitive firm to continue to produce at a loss?

P > minimum of the AVC

The price must be greater than the AVC, meaning that the 

firm can be incurring a loss and should still keep operating as it 

is covering some of its fixed costs

once the price = minimum of the AVC this is the shut-down point

no amount of good would be produced if price falls below the AVC as 

the firm isn't at that point covering its variable costs (Labor)

and should shut down

E.    At the profit-maximizing price would the monopolistically competitive firms demand be inelastic, elastic or unit elastic? Explain.

Notice at Profit Max the firm is producing in the Elastic section of its demand curve
The Demand Curve is Unit Elastic where MR = 0
Explanation = The Elastic Section of the Demand curve is where MR is Positive

F.    Does the Monopolistically Competitive Firm produce the allocatively efficient quantity in the long run? Explain.

NO, the Monopolistically Competitive Firm is not 
Allocatively Efficient as its P > MC

G.   Does the Monopolistically Competitive Firm produce the productively efficient quantity in the long run? Explain.

NO, the Monopolistically Competitive Firm is not 
Productively Efficient as its P > MC

H.   Assume there is a Lump Sum tax imposed on all taco trucks in the Phoenix area how would this lump sum tax affect the price and quantity of tacos produced by Charles’s taco truck. How would it affect Charles’s profits or losses?

Lump Sums tax's are like FC in that they do not affect the firms MC curve

if MC is not affected then quantity and price of the firm cannot change.

The tax would reduce the amount of profits or increase Charles's losses

I.      Assume there is a Per-Unit tax imposed on all taco trucks in the Phoenix area how would this per unit tax affect the price and quantity of tacos produced by Charles’s taco truck. How would it affect Charles profits or losses?

Per Unit taxes  are like VC in that they do affect the firms MC curve - shifting it left

This would increase the price and decrease the quantity.

The tax would reduce the amount of profits or increase Charles's losses

J.     Assume instead that the price for a license for taco trucks (a fixed cost) increases, how does this affect the price and quantity of tacos produced by Charles’s taco truck. How would it affect Charles profits or losses and specifically speak to what curve will shift and the direction of shift.

A increase in FC would not affect the firms MC curve and 

therefore the price and quantity would not change.

but an increase to FC does shift the ATC up 

so profits are decreased or losses are increased

K.   Charles is making positive economic profits in the short-run. Relative to this short run scenario, what happens to the following in the long run? Explain clearly what happens to the Demand and MR curves.

a.     The number of firms in the market (industry)

b.     The price in the market (industry)

c.     The quantity produced in the market (industry)

d.     The price of Charles’s Tacos

e.     The quantity produced by Charles’s Tacos

(a.) As their are positive profits in the Short run firms will enter in the long run

(b.) as firms enter the price will decrease

(c.) more taco trucks mean more quantity of tacos produced in the long run
(d.) Charle's demand and MR curves will shift to the left
(e.) Price and Quantity of Charles tacos will decrease

L.    Now assume the demand for tacos increases what happens to the price and quantity of Charles’s tacos.

 If Demand for Tacos increase then the price & quantity will increase.

M.  Draw a graph of Charles’s tacos making positive economic profits and label the quantity where revenue would be maximized. 

N.   Now assume that the City of Phoenix has increased the minimum wage that Charles pays his workers. How would this increase in the minimum wage (a variable cost) affect the price and quantity and DWL of tacos produced by Charles? Explain using a graph shifting the appropriate curves.

Minimum Wages are Variable Costs (VC) and do affect the MC curve

if variable costs increase the firms MC curve will shift left

prices increase and quantity decreases DWL increases

O.   When firms enter the taco industry in the long run explain what happens to the demand and marginal revenue curve of Charles’s taco truck.

As firms enter the new firms enter they compete away some of Charles's customers 

with their inferior tacos 

The demand & MR curves for Charles's tacos shifts left - decreases

P.    When firms exit the taco industry in the long run explain what happens to the demand and marginal revenue curve of Charles’s taco truck.

When firms exit the taco truck industry

there is an increase demand for Charles tacos as more customers 

The demand and MR for Charle's Tacos increases

Q.   Do forms in this industry experience economies of scale, diseconomies of scale, or neither in the long run? Explain.

Yes, If the firm is in Long Run Equilibrium

then consider the SRATC as the LRATC, 

notice we are producing the quantity of tacos in the 

downward sloping section of our LRATC curve

R.    What activity could Charles engage if he wanted to cause the demand for his tacos to become more inelastic? Explain.

Advertising will make the demand for Charle's Tacos more inelastic

Why?

If you don't know about my tacos your demand for my tacos is very elastic

But when you see my advertisement my tacos become more of a necessity

You need them have to have them

Your demand for my tacos just became more inelastic

S.     If Firms selling other goods enter the market would the demand curve for Charles’s Tacos become more elastic, inelastic, or neither? Explain.

More substitutes for tacos implies the demand for tacos has

just become more elastic.

More substitutes = more elastic demand

Less substitutes = more inelastic demand