A)Total market quantities... increase, decrease, stay the same?

B)Market prices... increase decrease, stay the same?

C)Total market profits... incrase, decrease, stay the same?

D)Consumer surplus... increase, decrease, stay the same?

E)Deadweight loss... increase, decrease, stay the same?

BACKGROUND: Suppose the Jersey Club, a local monopoly is currently selling its profit maximizing quantity of 100 salads for 7.5. The marginal Cost of a salad is equal to Average Total Cost and is $3. The Demand for Salads is given by Qd=240-20P. The Monopolistic profit is $450.

Suppose that GREEN salads, a

potential competitor, now gets permission to enter the market. Jersey Club

people optimize and will all go wherever salad prices are lowest. If prices are

the same, they split their business equally. Suppose the Jersey Club and the

GREEN salads continue to sell salads at 7.5.

a) how many salads will each

supplier sell?

b) what will total profits in

the salad market be?

c) Does GREEN salads have an

incentive to lower their price to $7?

d) Explain your answer in C

using numbers to support your answer (Hint: Use Qd)

e) what happens to total

profits in the salad market? (increase, decrease, stay the same)

a.

If output is sold at $7.5 per

unit by both producers then the demand of the good in the market is calculated

as follows:

Total Market Demand = Qd =

240 - 20P

= 240 - 20 * 7.5

= 240 - 150

= 90

Supply of Jersey Club = 90/2

= 45

Supply of Green Salad = 90/2

= 45

b.

The total profit in the salad

market is calculated as follows:

Profit = (P - ATC) * Q

= (7.5 - 3) * 90

= 4.5 * 90

= 405

Profit of the Jersey club =

405/2

= 202.5

Profit of Green Salad = 405/2

= 202.5

c.

Yes, Green Salad has an

incentive to lower down the price. It is because at the price of the $7, the

producer will grab all the market and operate as monopolist.

d.

If Green Salad reduces price

to $7 per units then the demand of Jersey club will be zero and the profit of

the Green Salad is calculated as follows:

The demand of the good is

calculated as follows:

Qd = 240 - 20 P

= 240 - 20 * 7

= 240 - 140

= 100

At this output, it will

maximize its profit same as the Jersey club was doing initially.

e.

The profit of the market is

calculated as follows:

Profit = (P - ATC) * Q

= (7 - 3) * 100

= $400

The profit is lower than the

$405 or $450. Thus, the profit has decreased as compared to two situations

before but the Green Salad firm is better off individually as its profit

increased from $202.5 to $400.