Answered: Suppose the market for tattoo shops in…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Transcribed Image Text:**Understanding Price Changes in Monopolistically Competitive Markets** In the context of tattoo shops in Reno, which operate in a monopolistically competitive market, consider the scenario where the wages of tattoo artists decrease. This change results in a downward shift in the average cost curve for these tattoo shops. To explore the potential impact on prices in the long run, we will examine two possibilities: a. **An Increase in Prices by Existing Shops in the Long Run** b. **A Decrease in Prices by Existing Shops in the Long Run** ### Explanation: **a. Price Increase Possibility:** - **Demand Dynamics:** As costs decrease and profits increase for existing shops, the market may become more attractive, potentially reducing product variety and boosting brand loyalty. This could enable existing shops to increase prices due to perceived uniqueness or enhanced value. - **Quality and Differentiation:** Shops might invest in better quality or differentiate their services with the extra profits, allowing for higher pricing in response to improved offerings. **b. Price Decrease Possibility:** - **Market Entry:** Lower costs and higher profits can attract new competitors, increasing supply in the market. This heightened competition often forces existing shops to lower prices to maintain their market share. - **Cost Pass-Through:** With reduced costs, shops may opt to pass on the savings to consumers in the form of lower prices, aiming to stimulate demand and secure loyalty. ### Visual Interpretation (No Graphs Included): If a graph were utilized, it would illustrate the shift of the average cost curve downward, and the corresponding effects on the price and quantity equilibrium in the market. A demand curve could show consumer response to price changes, while a supply curve might reflect increased or decreased market entries due to changing profitability. Understanding these variables helps explain how market dynamics and strategic decisions can lead to either outcome in a monopolistically competitive setting.

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