Raphael's hair salon is a profit-maximizing single price monopoly located in a small town, and is currently earning an economic profit. (a) Does Raphael's hair salon produce the allocatively efficient quantity? Explain. (b) Assume that Raphael signs a new lease with an increase in rent, a fixed cost. Will the price of haircuts provided by Raphael increase, decrease, or stay the same in the short run? Explain. (c) Assume that new hair salons enter the market and that the market becomes monopolistically competitive. Answer each of the following. i. The entry of new hair salons creates close substitutes for each individual salon's services. As a result, will the demand for Raphael's hair salon become more elastic, less elastic, or will there be no change in the elasticity? ii. Will the entry cause the demand curve for Raphael's haircuts to shift to increase, decrease, or stay the same? iii. In long-run equilibrium, will Raphael's hair salon produce the productively efficient quantity? Explain.

Raphael's hair salon is a profit-maximizing single price monopoly located in a small town, and is currently earning an economic profit. (a) Does Raphael's hair salon produce the allocatively efficient quantity? Explain. (b) Assume that Raphael signs a new lease with an increase in rent, a fixed cost. Will the price of haircuts provided by Raphael increase, decrease, or stay the same in the short run? Explain. (c) Assume that new hair salons enter the market and that the market becomes monopolistically competitive. Answer each of the following. i. The entry of new hair salons creates close substitutes for each individual salon's services. As a result, will the demand for Raphael's hair salon become more elastic, less elastic, or will there be no change in the elasticity? ii. Will the entry cause the demand curve for Raphael's haircuts to shift to increase, decrease, or stay the same? iii. In long-run equilibrium, will Raphael's hair salon produce the productively efficient quantity? Explain.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter24: Price-searcher Markets With High Entry Barriers

Section: Chapter Questions

Problem 13CQ

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