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# Monopolistically competitive

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Consider a small city's dry-cleaning market, which is monopolistically competitive. Currently, the typical dry-cleaner is charging \$5 an item. The average cost of dry-cleaning is \$2. The typical dry-cleaners clean 1,000 items per week. (Each customer drops off approximately 4 items).

Suppose, a new dry-cleaner was to enter the market, and explain what would happen to the price, average cost, output, and profit of a typical dry-cleaner.

Eventually, what is the long run equilibrium?

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#### Solution Preview

Price = \$5 an item
Average Cost of Dry Cleaning = \$2
Margin = 5 - 2 = \$3 per item
So the net profits per week will be 1000 X 3 = \$3,000

As the new firm enters, the demand for existing firm will reduce with its marginal revenue. Thus the price that it charges will also reduce (remember MR=MC for profit ...

#### Solution Summary

The solution evaluates a Monopolistically competitive environment and provides answers to the question asked.

\$2.49