Question

Question

Forever 21 has closed all stores in Hong Kong due to fierce competition in the clothing retailing industry.

a)What is the market structure of Forever21? What are the three attributes of competition to Forever 21?

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.

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?

d)Draw a new diagram and indicate the “consumer surplus” derived from the purchase of the clothing industry on the new diagram.

e)Define “the deadweight loss”. Also, show the deadweight loss relative to the efficient level of output in the above new diagram.

Answer 1

(a) Answer

> What is the market structure of forever21 ?

- The Market Structure means to the characteristics of the market either forever21 or competitive, that describes the nature of competition and the pricing policy followed in the market where exist the forever21. market structure can be defined as, the number of firms producing the identical clothes in the market and forever21 structure is determined on the basis of the competition which is present in that market.

> What are the three attributes of competition to forever21 ?

1. Large number of buyer and seller :

- In the competition there are large number of buyer and seller is survive in the market to sell there product and services to the number of buyer. so, there huge level of competition is there. as same in forever21 has clothing stores but there lot of buyer are come to sell there clothes in there industry, then there are large number seller for clothes producing and selling due to that forever21 havw to close all the store in hong kong.

2. Free entry and exit of firm :

- In the competition government has no power to stop to enter into market to sell the product and services. so, that to the forever21 number of seller as same product enter into the market and forever turnover has going to down day by day. so, forever has to decide to exit the market as soon as possible.

3. Absence of price control :

- In the competition no one can decide price, only price are decide by the customers demand. that has forever21 have a no control on price to decide the margin on the clothes product so that they suffer loss. Because the forever has to decide to increase then there are also have other seller to sell clothes so to attracts the customer forever21 have to low the price of the clothes.

(b) Answer

> Demand curve of forever21 :-

- Demand curve is showing a demand of the clothes products that is down day by day so, it has to be suffering a loses.

> Marginal Revenue Curve:-

> Average Total Cost Curve:-

- Average total cost curve is based on the average total fixed cost and average variable cost.