Final Exam Answers
Final Exam
PMBA 8030
TRACI’S SALON
1) Retail Hairstyling Industry
Number of firms – many
Entry conditions – easy
Product type – few to many
Conduct of firms – less aggressive
Retail hairstyling industry is considered to be a monopolistic competition where there are many firms selling similar but not identical goods and services. In monopolistic markets, there are a large number of sellers and they can easily enter or leave the market. This is most common market in the U.S. economy, especially in general retailing. In this industry, firms are most likely to engage in non-price competition, such as advertising, promotion, and customer service initiatives.
2) Traci’s Hairstyling Salon – Cost & Revenue Data
3) Demand, Marginal Revue, Marginal Costs, & Average Total Cost Curves
4) Maximizing Profits:
a. Price charged – $30
b. Maximizing Quantity – 4
5) Total Profit when Maximizing Profits - $84 total profits when 4 haircuts sold
6) In Perfect Competition – What is Market Price & Output Level
In a perfect competition, demand equals marginal revenue. The market price would be around $10 at an output level of 6 where marginal revenue and marginal cost intersect. Because demand price and marginal revenue are the same, long-run equilibrium occurs where marginal revenue, marginal cost, and the lowest long-run average cost intersect.
7) Define Economic Profits – Will they earn positive economic profits in the long run? Explain.
Economic profit (also commonly known as the economic value added) measures an entity’s economic profit by using accounting earnings before deducting interest and deducts from that the dollar value of opportunity cost associated with long-term debt and shareholders’ equity. Opportunity cost is defined as cost of capital. The basic formula for economic profits is: EVA = Earnings before interest – [(Opportunity Costs) x (LT Debt + SE)]
Not likely due to the law of diminishing
PMBA 8030
TRACI’S SALON
1) Retail Hairstyling Industry
Number of firms – many
Entry conditions – easy
Product type – few to many
Conduct of firms – less aggressive
Retail hairstyling industry is considered to be a monopolistic competition where there are many firms selling similar but not identical goods and services. In monopolistic markets, there are a large number of sellers and they can easily enter or leave the market. This is most common market in the U.S. economy, especially in general retailing. In this industry, firms are most likely to engage in non-price competition, such as advertising, promotion, and customer service initiatives.
2) Traci’s Hairstyling Salon – Cost & Revenue Data
3) Demand, Marginal Revue, Marginal Costs, & Average Total Cost Curves
4) Maximizing Profits:
a. Price charged – $30
b. Maximizing Quantity – 4
5) Total Profit when Maximizing Profits - $84 total profits when 4 haircuts sold
6) In Perfect Competition – What is Market Price & Output Level
In a perfect competition, demand equals marginal revenue. The market price would be around $10 at an output level of 6 where marginal revenue and marginal cost intersect. Because demand price and marginal revenue are the same, long-run equilibrium occurs where marginal revenue, marginal cost, and the lowest long-run average cost intersect.
7) Define Economic Profits – Will they earn positive economic profits in the long run? Explain.
Economic profit (also commonly known as the economic value added) measures an entity’s economic profit by using accounting earnings before deducting interest and deducts from that the dollar value of opportunity cost associated with long-term debt and shareholders’ equity. Opportunity cost is defined as cost of capital. The basic formula for economic profits is: EVA = Earnings before interest – [(Opportunity Costs) x (LT Debt + SE)]
Not likely due to the law of diminishing