We have a firm that produces shoes. There are many competitors in the market but through a series of aggressive PR-campaigns, we have built a rumor around our brand, the X-shoe, so that it is perceived as somewhat special. Unfortunately, several of our competitors have done the same. Because of this, we have some power of price setting in the market. If we increase our price, some of our customers will change brands, but not all of them. Our most diehard fans will stay. If we, on the other hand, lower the price we will attract some customers from our competitors, but not all. There are no barriers to entry for new firms. If they want to, they may even copy our PR-strategy.
a) Show in a graph how this situation can be described. The marginal cost depends on the quantity produced: MC = 2*Q. The (inverse) demand curve is p = 30 Q. The marginal revenue curve of the firm is MR = 30 2*Q. Furthermore, the firm's average total cost, ATC, at different quantities are:
|
Q
|
ATC
|
|
2
|
20
|
|
5
|
12.5
|
|
7
|
12
|
|
10
|
13
|
|
12
|
15
|
|
15
|
18
|
|
20
|
23
|
|
25
|
27
|
b) Which price and which quantity will this firm choose if it wants to maximize profit? How large will the profit be?
c) If no barriers to entry exist, the long-run situation will be different. How will this change the graph you have drawn?
d) Is the situation in the short run, and in the long run, efficient? Why or why not?