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).
Attachments
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.