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Profit Maximization in a Monopoly for Sears Two-Step Carpet Cleaning Process

Question 2

Sears markets an innovative two-step carpet cleaning process. Because leftover carpet cleaning solutions
can act as a magnet for dirt, Sears exclusive two-step carpet cleaning system includes a specifically formulated
pH-balancing fiber rinse that removes carpet cleaning solution residue right along with deep-down dirt. According
to Sears, all that's left behind is a cleaner, softer, more beautiful carpet.

A) Assume the following table shows relevant information for Sear's two-step carpet cleaning business in a
medium-size metropolitan area. Complete the following table.
Square Yards Price Total Revenue ($000) Marginal Revenue ($000) Total Cost ($000) Marginal Cost ($000)
0 $30 $0
1 $28 $26
2 $26 $48
3 $24 $68
4 $22 $88
5 $20 $100

B) While Sear's enjoys a monopoly position, what is their output, price, and profit at the profit-maximizing activity level?
C) What is the output, price, and profit for this product if a monopolistically competitive equilibrium evolves in this
market following the successful introduction of competitor services? (Assume similar costs conditions for each firm).

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Solution Preview

Please refer attached file for better clarity of tables and formulas.

Solution:

A) Assume the following table shows relevant information for Sear's two-step carpet cleaning business in a
medium-size metropolitan area. Complete the following table.

Sq/Yards Output Price Total Revenue ($000) Marginal Revenue ($000) Total Cost ($000) Marginal Cost ($000)
Price *Output Change in TR/Change in Output Change in TC/Change in Output
0 $30 $0 $0
1 $28 $28 $28 $26 $26
2 $26 $52 $24 ...

Solution Summary

This solution describes the steps in determining profit maximizing output and price in case of monopoly and monopolistically competitive industry in an attached Excel file.

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