The table below shows the total variable costs faced by Arlo's Eye Care for different quantities of reading glasses sold. QUANTITY TOTAL VARIABLE COST 1 $20 2 $25 3 $35 4 $50 5 $70 6 $95 7 $125 8 $160 9 $200 10 $245 Arlo's Eye Care sells reading glasses in a perfectly competitive market with a downward-sloping demand curve and an upward-sloping supply curve. The market price is $33 per unit, and the total fixed cost is $30. a. Identify the profit-maximizing quantity. Explain using marginal analysis. b. Calculate the economic profit at the profit-maximizing quantity you identified in part. Show your work. c. Based on your answer to part (b), will the number of firms in the industry increase, decrease, or stay the same in the long run? Explain.
The table below shows the total variable costs faced by Arlo's Eye Care for different quantities of reading glasses sold.
|
QUANTITY |
TOTAL VARIABLE COST |
|
1 |
$20 |
|
2 |
$25 |
|
3 |
$35 |
|
4 |
$50 |
|
5 |
$70 |
|
6 |
$95 |
|
7 |
$125 |
|
8 |
$160 |
|
9 |
$200 |
|
10 |
$245 |
Arlo's Eye Care sells reading glasses in a
a. Identify the profit-maximizing quantity. Explain using marginal analysis.
b. Calculate the economic profit at the profit-maximizing quantity you identified in part. Show your work.
c. Based on your answer to part (b), will the number of firms in the industry increase, decrease, or stay the same in the long run? Explain.
d. The income elasticity of demand for reading glasses is 1.4, and the cross-price elasticity of demand for sunglasses with respect to the price of reading glasses is -0.75. Based on your answer to part (c), what will happen to the demand for sunglasses? Explain.
e. Now assume that the market in which Arlo's Eye Care operates is a
- i. Suppose the government imposes an annual tax of $2,000 on Arlo's Eye Care, regardless of how many pairs of glasses they sell. Will the profit-maximizing quantity of reading glasses for Arlo's Eye Care increase, decrease, or stay the same in the short run? Explain.
- ii. Suppose Arlo's Eye Care was able to charge each customer a price for reading glasses equal to their
willingness to pay . Would thedeadweight loss in the market increase, decrease, or stay the same as a result?
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