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A recent marketing survey shows that the Santa Barbara exhibits a high growth in bathing suit market. Consequently, seventeen new bathing suit stores now enter the market, joining the seven that already existed. Therefore, the demand schedule facing Swim N Style (and all other stores) falls, while the cost schedules for both old and new stores remain constant. The following represents the new demand schedule.
Suits sold (per hour) Price
1. Calculate the new total revenue, average revenue, and marginal revenue at each level of sales for the store under increased competition.
2. What number of suits will Swim N Style sell now? Why? Show the detail calculations and explain the reason.
3. What price will Swim N Style now charge? Why? Show the detail calculations and explain the reason.
4. What will its profit be under the increased competition? Show the detail calculations and explain the reason.
5. Is the market in long-run equilibrium now? Why? Clearly explain the reason.
6. What is the average cost per swimsuit now sold? Show the detailed calculations and explain the reason.
7. How many swimsuits are now sold in Santa Barbara each hour under increased competition, and what is the total cost incurred? Show the detailed calculations and explain the reason.
8. Suppose the number of swimsuits sold remained constant under the increased competition, but the number of stores was reduced so that each was operating at its point of minimum average cost. How many stores would now be in operation? Why? Show the detailed calculations and explain the reason.
9. Now that few stores have closed, what would be the total costs of all the remaining stores taken together? Compare this to your answer when all the stores were in operation. Show the detailed calculations and explain the reason for difference/similarity.
10. Summarize what you have learned from this case about the efficiency of monopolistic competition.
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