2. You have worked for many years in New York City as an entrepreneur. You decide to move to Santa Barbara for its sunny and mild weather, and the beautiful ocean. You consider opening up a pizza shop, a juice bar, or a dry cleaner around the area. In order to decide on which business to invest, you decide to conduct a market analysis. You start from analyzing the market for dry cleaning in Santa Barbara, Goleta, and Carpinteria. You collect data on the dry cleaners currently operating in the market and find how much they charge for dry cleaning a men's shirt. Dry cleaner City Price $1.50 1.95 1.95 1.95 2.00 2.00 2.00 2.00 A-1 Cleaners Regal Cleaners St. Paul Cleaners Zip Kleen Dry Cleaners Effie the Tailor Magnolia Too Master Cleaners Santa Barbara Cleaners Sunny Cleaners Casitas Cleaners Rockwell Cleaners Norvelle Bass Cleaners Ablitt's Fine Cleaners California Cleaners Justo the Tailor Pressed 4 Time King's Cleaners Santa Barbara Santa Barbara Santa Barbara Santa Barbara Santa Barbara Goleta Santa Barbara Goleta Santa Barbara Carpinteria Carpinteria Santa Barbara Santa Barbara Goleta Santa Barbara Goleta 2.00 2.10 2.10 2.15 2.25 2.25 2.25 2.50 Goleta 2.50 (d) Congratulations! You have just purchased King's Cleaners and enjoyed a year with positive profits. During this year, potential investors took notice in the profits in the Goleta area. You have learned that an entrepreneur opened up a new dry cleaner called Can't Touch This Cleaners. It charges $1.95 per shirt. What is the new average price of dry cleaning a shirt in Goleta now? Illustrate the effect of entry on the average Goleta price by a shift of the short-run supply curve, the demand curve, or both. (Hint: To find the new market equilibrium price, you should calculate the new average price with Can't Touch This Cleaners in the market.) (e) Assume that your dry cleaner store 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. (f) After many years operating with zero profits (although zero economic profit covers your opportunity cost of $1 million a year operating a pizza shop!) you notice that long-run going prices in Goleta are somewhat higher than the long-run prices in Santa Barbara. What does this average difference in prices between Goleta and Santa Barbara imply about costs in the two cities? 2. You have worked for many years in New York City as an entrepreneur. You decide to move to Santa Barbara for its sunny and mild weather, and the beautiful ocean. You consider opening up a pizza shop, a juice bar, or a dry cleaner around the area. In order to decide on which business to invest, you decide to conduct a market analysis. You start from analyzing the market for dry cleaning in Santa Barbara, Goleta, and Carpinteria. You collect data on the dry cleaners currently operating in the market and find how much they charge for dry cleaning a men's shirt. Dry cleaner City Price $1.50 1.95 1.95 1.95 2.00 2.00 2.00 2.00 A-1 Cleaners Regal Cleaners St. Paul Cleaners Zip Kleen Dry Cleaners Effie the Tailor Magnolia Too Master Cleaners Santa Barbara Cleaners Sunny Cleaners Casitas Cleaners Rockwell Cleaners Norvelle Bass Cleaners Ablitt's Fine Cleaners California Cleaners Justo the Tailor Pressed 4 Time King's Cleaners Santa Barbara Santa Barbara Santa Barbara Santa Barbara Santa Barbara Goleta Santa Barbara Goleta Santa Barbara Carpinteria Carpinteria Santa Barbara Santa Barbara Goleta Santa Barbara Goleta 2.00 2.10 2.10 2.15 2.25 2.25 2.25 2.50 Goleta 2.50 (d) Congratulations! You have just purchased King's Cleaners and enjoyed a year with positive profits. During this year, potential investors took notice in the profits in the Goleta area. You have learned that an entrepreneur opened up a new dry cleaner called Can't Touch This Cleaners. It charges $1.95 per shirt. What is the new average price of dry cleaning a shirt in Goleta now? Illustrate the effect of entry on the average Goleta price by a shift of the short-run supply curve, the demand curve, or both. (Hint: To find the new market equilibrium price, you should calculate the new average price with Can't Touch This Cleaners in the market.) (e) Assume that your dry cleaner store 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. (f) After many years operating with zero profits (although zero economic profit covers your opportunity cost of $1 million a year operating a pizza shop!) you notice that long-run going prices in Goleta are somewhat higher than the long-run prices in Santa Barbara. What does this average difference in prices between Goleta and Santa Barbara imply about costs in the two cities