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Sleek Sneakers Co. is one of many firms in the market for shoes. a) Assume that Sleek is currently earning short-run economic profit. On a correctly labeled diagram, show Sleeks profit-maximizing output and price, as well as the area representing profit. b) What happens to Sleeks price, output, and profit in the long run? Explain this change in words, and show it on a new diagram. c) Suppose that over time consumers become more focused on stylistic differences among shoe brands. How would this change in attitudes affect each firms price elasticity of demand? In the long run, how will this change in demand affect Sleeks price, output, and profit? d) At the profit-maximizing price you identified in part(c), is Sleeks demand curve elastic or inelastic? Explain.
a) The diagram is shown below: b) Whenfirmsinmonopolisticallycompetitivemarketgainsupernormalprofitintheshortterm,newfirmswillenterthemarket.Someof ourexistingcustomerswillbuythenewfirm.Thus,firmsthathavesupernormalprofitswouldsufferalackofcustomersandthefirmdemandcurvewillshifttotheleftfromAR0=D0DandMtoAR1D1D1anduntilallfirmsinmonopolisticallycompetitivemarketmakenormalprofitsmarketinlong-term. DiagramaboveshowstheadjustmentofSleekfromsupernormalprofittonormalprofitinthelongtermbecauseoftheentryofnewfirmsintothemark (A)Intheshortterm,theequilibriumreachedwhenmarginalcostsequalmarginalrevenue(MC=MR0)atpointE0.AtthepointE0,thequantityofoutputis20unitsandthepriceisRM10.SleekhavesupernormalprofitofRM100(TR(RM200)-TC(RM100)). (B)ThesupernormalprofitsenjoyedbySleekwillattractnewfirmsintothemarketandcausethedemandcurveandmarginalrevenuecurvesshifttotheleftfromAR0=D0D0andMR0toAR1=D1D1andMR1 Inthelongterm,thenewequilibriumreachedwhenmarginalcostsequalmarginalrevenue(MC=MR1)atpointE1.AtpointE1,thequantityofoutputis15unitsandthepriceisRM8.Totalrevenueissametothetotalcost,thatisRM120.Thus,inthelongterm,Sleekwillmakenormalprofitsandnonewfirmswillenterthemarket….

ts,andmuchlesscommonwithhomogeneousgoods. Buyersarewillingtopaymorefortheshoesbecausetheyviewtheshoesasbeingmoredifferentthantheotherwisewould.Ifso,itwouldmakemarketslesscompetitiveandSleeksdemandcurvesmoreelastic,andthiswouldleadfirmstochargehigherprice.But,advertisingmightmakeeasierforcustomertofindtheSleekofferingthebestprice,inthiscase,itwouldmakemarketsmorecompetitiveandfirmsdemandcurvesmoreelastic,whichwouldleadtolowerprice,so,theoutputandtheprofitwillincrease.Inthelongrun,thedemandofthewilldecrease,AdvertisingbyallfirmsmightdecreasethedemandforanyonefirmsproductandalsodemandofSleeksshoes,sothedemandcurvesofSleeksshoesbecomemoreelastic. (D)TheSleeksdemandwillbecomemoreelastic.BecauseadvertisingmightmakeeasierforcustomertofindtheSleekofferingthebestprice,itwouldmakemarketsmorecompetitiveandfirmsdemandcurvesmoreelastic,whichwouldleadtolowerprice



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