Chapter 12, Problem 12P

To determine

1. The average price per shirt washed and ironed in Santa Barbara and in Goleta.
2. The typical marginal cost and average total cost curves for California Cleaners in Goleta, assuming it is a perfectly competitive firm but is making a profit on each shirt in the short run. Also, the short-run equilibrium point needs to be marked and the area that corresponds to the profit made by the dry cleaner needs to be shaded.
3. If $2.25 is the short-run equilibrium price in Goleta, draw a typical short-run demand and supply curve for the market and label the equilibrium point.
4. The new average price of washing and ironing a shirt in Goleta, if another dry cleaning service named Diamond Cleaners enters the market and charges $1.95 per shirt. Also, illustrate the effect of entry on the average Goleta price by a shift of the short-run supply curve, the demand curve, or both.
5. Assume that California Cleaners now charges the new average price and just breaks even (that is, makes zero economic profit) at this price. Show the likely effect of the entry on your diagram in part b.
6. If the dry cleaning industry is perfectly competitive, what does the average difference in price between Goleta and Santa Barbara imply about the costs in the two areas?

Concept Introduction:

Marginal Cost - It is the cost of producing an additional unit of output.

Average Variable cost - It is the firm’s variable cost that is expressed in terms of a unit.

Average Total Cost - It is the firm’s total cost that is expressed in terms of each unit.

Demand - It is the quantity of a commodity that a consumer is willing to purchase at a particular price in a given period of time.