Suppose the monopolistically c

Suppose the monopolistically competitive barber shop industry ina community is in long-run equilibrium, and that the typical priceis $20 per haircut. Moreover, the population is rising.

a.  Illustrate the short-run effects of a change onthe price and output of a typical firm in the market.

b. Show what happens in the long run. Will the final price behigher than $20? Equal $20? Be less than $20? Assume that nothinghappens to the cost of producing haircuts.

c. Suppose that, initially, the price of a typical children’shaircut is $10. Do you think this represents price discrimination?Why or why not?

Can you please answer this through a graph and movement incurves.

Answer:

Suppose the monopolistically competitive barber shop industry ina community is in long-run equilibrium, and that the typical priceis $20 per haircut. If the population is rising, this means thatthe demand for haircut will increase, this increase in demand forhaircut shifts the demand curve upward.

a. the short-run effects of a change on the price and output ofa typical firm in the market can be seen from the followingdiagram.

Inthe short run with increase in demand since supply cant beincreased so the price increases to P1 and hence there is economicprofit.

b. Since it is a monopolistically competitive industry so thereis no or very little barriers of entry and exit. Since the firmsare making economic profit so new firms will enter the market inthe long-run and hence initial equilibrium price will be restoredat $20 because of an increase in supply.

c. Suppose that, initially, the price of a typical children’shaircut is $10, I think that this is some short of pricediscrimination as we know price discrimination is the act ofcharging different prices from different customers for similar typeof goods or service on different basis. So here haircut is almostsimilar for an adult or a child it doesn’t have much difference, sothis is one type of price discrimination.


 
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