Bow Wow Bazaar is a growing firm specializing in gourmet dog food and supplies in Florida resort communities. BWB's demand and cost information are as follows:
P = 4500 - Q
MR = 4500 - 2Q
TC = 150,000 + 400Q
MC = $400
where Q is output, P is price in dollars, MR is marginal revenue, TC is total cost and MC is marginal cost. All costs include a normal return of 12% on capital investment. Show all work in your answers.
A. Determine the profit-maximizing price and output levels, and the profit earned.
MR=MC
4500-2Q=400
-2Q=-4100
Q=2050
P=4500-2050
P=2450
B. Based on your results in Part A and assuming the firm operates in a monopolistically competitive industry, explain what will happen to this industry in the long run?
C. Determine the output level, price, and profits that will occur in long-run equilibrium. Assume a high-price, low-output scenario assuming a parallel shift of the firm's demand curve. Be sure to explain what you are doing and why. Hint: The slope of the ATC curve is -$150,000/Q2.
D. Calculate BWB's new long-run equilibrium demand curve.