Suppose that a monopolistically competitive restaurant is currently serving 240 meals per day (the output where MR = MC). At that output level, ATC per meal is $13 and consumers are willing to pay $17 per meal. What is the size of this firm’s profit or loss? Will there be entry or exit? Will this restaurant’s demand curve shift left or right as a result?
1. A recent study determined the following elasticities for Volkswagen Beetles:
Price elasticity of demand = 2
Income elasticity of demand = 1.5
The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning.
a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%.
b. An increase in consumer income will increase the price and quantity of Beetles sold. Since price elasticity of demand is greater than 1, total revenue will go down.