Question

Loved by tweens to young adults, Forever 21's mall presence and low average
prices have long made it a one-stop-shop for affordable, trendy fashion around the world.
Even Blake Lively once admitted she wore the brand's clothes on the red carpet! The brand
first came to Hong Kong in 2011 with a six-storey flagship store in Causeway Bay, before
expanding to Mong Kok five years later, and finally closing the Causeway Bay store two
years ago.
Yet as the American retailer continues to be hit by challenges from every corner (debt,
lawsuits and more), the company was forced to file for bankruptcy in August and has started
to close its 'unprofitable' stores one by one.
Turns out nothing is forever after all, certainly not Forever 21.
(Source: By Sarah Moran Wednesday September 25 2019, Retrieved from
https://www.timeout.com/hong-kong/news/forever-21-closes-its-last-hong-kong-store-
092519 )
Question
Forever 21 has closed all stores in Hong Kong due to fierce competition in clothing retailing
industry.
a) What is the market structure of Forever 21? What are three attributes of competition
to Forever 21? (2 marks)
b) Assuming that Forever 21 is running a loss, draw a diagram showing Forever 21’s
demand curve, marginal-revenue curve, average-total-cost curve, and marginal-cost
curve in the long-run equilibrium.
Label Forever 21’s loss-minimization output and price. (4 marks)
c) In the long-run equilibrium of the clothing industry, what happens to
i) the economic profit of all existing firms; and ii) the price? (4 marks)
d) Draw a new diagram and indicate the “consumer surplus” derived from the purchase
of the clothing industry on the new diagram. (6 marks)
e) Define “the deadweight loss”. Also show the deadweight loss relative to the efficient
level of output in the above new diagram.

Answer 1

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