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The Unisex International Haircutters, Inc., faces the following demand function for haircuts per day: QD = 240 – 20P
A. Draw a figure showing the demand curve and the corresponding marginal revenue curve of the firm. On the same figure draw a typical MC, ATC, and AVC curve showing that the best level of output is 80 haircuts per day, and that ATC = $10 and AVC = $6 at Q = 80.
B. How much profit or loss per haircut does the firm have? Does the firm remain in business in the short run? Why?
2. A two-firm cartel producing industrial diamonds faces the following demand function:
Q = 120 – 10P or Q = 12 – 0.1P
The MC and the ATC functions of each firm are, respectively,
MC 1 = 4 + 0.2Q 1 and ATC 1 = 4 + 0.1Q 1
MC 2 = 2 + 0.2Q 2 and ATC 2 = 2 + 0.1Q2
Draw a figure showing the best level of output and price for the cartel, and the output of each firm to minimize the total costs of production for the cartel, and calculate the profits per unit and in total for each firm.
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