Monopolistically competitive
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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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.
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Describe the market structure in which a typical professional sports team in or outside the United States (e.g. New York Yankees, Kansas City Wizards, New Jersey Nets, Manchester United, etc.) operates. Which structure Do they cleanly fit into (Monopoly, Oligopoly, etc.)? If yes, describe which one and support the conclusion you reached? If you believe they do not fit neatly into a structure, describe why not?
After you have reached your conclusion, examine and explain how, if at all, your conclusion changes if the scope of the marketplace changes, i.e., the area of consideration is narrowed or widened. The area of consideration may be the product or service under review, or the geographic area in which the product or service is offered.
Lastly, gather some information about a market structure called 'monopsony' and state why or why not that structure is relevant to the topic.
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