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Monopolies

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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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In a monopolistically competitive environment, as new companies enter, the demand for the products of the first firm will decline. With the decline in demand, marginal revenue will decline as well and ...

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