a) Assume the Sleek is currently earning short-run financial profit. ~ above a effectively labeled diagram, present Sleek’s profit-maximizing output and price, and also the area representing profit.

b) What wake up to Sleek’s price, output, and also profit in the lengthy run? describe this readjust in words, and also show the on a brand-new diagram.

c) mean that gradually consumers become much more focused on stylistic differences among shoe brands. Exactly how would this adjust in attitudes impact each that company price elasticity of demand? In the lengthy run, just how will this readjust in demand impact Sleek’s price, output, and profit?

d) in ~ the profit-maximizing price you established in part(c), is Sleek’s demand curve elastic or inelastic? Explain.




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a) The diagram is shown below: b) Whenfirmsinmonopolisticallycompetitivemarketgainsupernormalprofitintheshortterm,newfirmswillenterthemarket.Someof ourexistingcustomerswillbuythenewfirm.Thus,firmsthathavesupernormalprofitswouldsufferalackofcustomersandthefirmdemandcurvewillshifttotheleftfromAR0=D0DandMtoAR1D1D1anduntilallfirmsinmonopolisticallycompetitivemarketmakenormalprofitsmarketinlong-term. DiagramaboveshowstheadjustmentofSleekfromsupernormalprofittonormalprofitinthelongtermbecauseoftheentryofnewfirmsintothemark (A)Intheshortterm,theequilibriumreachedwhenmarginalcostsequalmarginalrevenue(MC=MR0)atpointE0.AtthepointE0,thequantityofoutputis20unitsandthepriceisRM10.SleekhavesupernormalprofitofRM100(TR(RM200)-TC(RM100)). (B)ThesupernormalprofitsenjoyedbySleekwillattractnewfirmsintothemarketandcausethedemandcurveandmarginalrevenuecurvesshifttotheleftfromAR0=D0D0andMR0toAR1=D1D1andMR1 Inthelongterm,thenewequilibriumreachedwhenmarginalcostsequalmarginalrevenue(MC=MR1)atpointE1.AtpointE1,thequantityofoutputis15unitsandthepriceisRM8.Totalrevenueissametothetotalcost,thatisRM120.Thus,inthelongterm,Sleekwillmakenormalprofitsandnonewfirmswillenterthemarket....


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ts,andmuchlesscommonwithhomogeneousgoods. Buyersarewillingtopaymorefortheshoesbecausetheyviewtheshoesasbeingmoredifferentthantheotherwisewould.Ifso,itwouldmakemarketslesscompetitiveandSleek’sdemandcurvesmoreelastic,andthiswouldleadfirmstochargehigherprice.But,advertisingmightmakeeasierforcustomertofindtheSleekofferingthebestprice,inthiscase,itwouldmakemarketsmorecompetitiveandfirm’sdemandcurvesmoreelastic,whichwouldleadtolowerprice,so,theoutputandtheprofitwillincrease.Inthelongrun,thedemandofthewilldecrease,Advertisingbyallfirmsmightdecreasethedemandforanyonefirm’sproductandalsodemandofSleek’sshoes,sothedemandcurvesofSleek’sshoesbecomemoreelastic. (D)TheSleek’sdemandwillbecomemoreelastic.BecauseadvertisingmightmakeeasierforcustomertofindtheSleekofferingthebestprice,itwouldmakemarketsmorecompetitiveandfirm’sdemandcurvesmoreelastic,whichwouldleadtolowerprice