Question

A dry-cleaning business operates in a monopolistically competitive market with the following demand and marginal revenue curves:
P = 100–5Q
   TR = 100Q–5Q2
MR = 100–10Q

The business’s total and marginal cost curves are:
TC = 4Q + Q2 + 5
MC = 4+2Q
where P is in dollars per unit, output rate Q is in units per time period, and total cost C is in dollars.

a) Determine the price and output rate that will allow the firm to maximize profit or minimize losses. Is this a long-run equilibrium? Why or not?

b) Suppose the short-run marginal product of labour curve for the dry cleaner is MPL = 6.20 – 0.04L. The business is running a special promotion and will charge $30 per family.

c) Determine how many employees will be hired by the dry cleaner if the daily wage rate is $168.

d) Determine how many employees will be hired by dry cleaner if the daily wage rate declines to $150.

e) Suppose the dry cleaner hires labour from competitive factor markets. Graphically illustrate and discuss the effect of an increase in the wage rate in a competitive labour market.

Answer 1