Some Questions on Entry and Exit: Experiment 8
Question 1
Demand for haircuts in the city of San Barberia is
given by the function
P=39-Q/20, where Q is the number of
haircuts per day and P is
the price of a haircut. Everyone who
opens a barber shop in town
has a fixed cost of $200 per day
which must be paid so long
as a shop is in business and
regardless of the number of
haircuts it sells. There is also a
variable cost of $4 for each
customer served. Each barber shop
has a capacity of 40
customers per day. San Barberia currently
has 12 barbershops. A
barber shop that is open cannot escape its
fixed costs immediately, but
must give 6 months notice to its
landlord of its intension to
close. It also takes about 6 months
to organize and open a new
barber shop. The short run supply
curve for haircuts in San
Barberia consists of
(a) a vertical segment
extending from the origin to the point
(0,4) and an unbounded horizontal line extending to the right
of
the point (0,4)
(b) a vertical segment
extending from the origin to the point
(0,4), a horizontal segment extending from (0,4) to (480,4),
and
a vertical segment extending upwards from (480,4).
(c) a vertical segment
extending from the origin to the point
(0,9), a horizontal segment extending from (0,9) to (480,9),
and
a vertical segment extending upwards from (480,9).
(d) a vertical segment
extending from the origin to the point
(0,4), a horizontal segment extending from (0,4) to (560,4),
and
a vertical segment extending upwards from (560,4).
(e) a vertical segment
extending from the origin to the point
(0,4), a horizontal segment extending from (0,4) to (360,4),
and
a vertical segment extending upwards from (360,4).
Question 2
What is the short run equilibrium price of a
haircut in San
Barberia?
(a) $15
(b) $5
(c) $4
(d) $9
(e) $20
Question 3
If initially, conditions in San
Barberia are as described in
the previous questions, and if in
the long run there is free
entry and exit from the industry,
competitive theory predicts
that in the long run in San Barberia
the number of barber shops
(a) would decrease and each
would sell more haircuts per day.
(b) would decrease and each
would continue to operate at full
capacity.
(c) would increase.
(d) would remain the same,
but each would sell more haircuts.
(e) would remain the same
and each would continue to operate at
full
capacity.
Question 4
Suppose that 5 new barbershops open in San
Barberia and
none of the old barbershops
close. In the new short run
equilibrium the price of a
haircut
(a) will be $9 and all
barbershops will make zero profits.
(b) will be $10 and all
barbershops will make positive profits.
(c) will be $8 and all
barbershops will make losses.
(d) will be $5 and all
barbershops will make losses.
(e) will be $6 and all
barbershops will make losses.
Question 5
In long run equilibrium in San Barberia, the
number of barber shops
(a) is 15 and the price of a
haircut is $9.
(b) is 17 and the price of a
haircut is $5.
(c) is 12 and the price of a
haircut is $15.
(d) is 13 and the price of a
haircut is $13
(e) is 16 and the price of a
haircut is $9.
Question 6
Suppose that in San Barberia, the number of
barber shops had adjusted so
that both the number of barber shops and the price of a hair cut were
in long run equilibrium. After long run equilibrium had been reached
without any taxes, the city unexpectedly imposed a tax on
barbers, requiring them to pay a $2 sales tax on every haircuts
they sold. What does economic theory
predict would be the short
run effect of the tax on the price of a hair cut?
(a) The price would rise by
$2.
(b) The price would rise by
$1.
(c) The price would remain
the same as before the tax.
(d) The price would rise by
$.50.
(e) The price would rise by
$1.50.
Question 7
How would the new $2 tax on hair cuts affect profits
of
barber shops in the short
run?
(a) since prices rise by the
amount of the tax, there would be no effect.
(b) profits would fall, but
would remain positive after the tax.
(c) profits would fall to
zero after the tax.
(d) in the short run, after
the tax is imposed, each firm would
have
a loss of $40.
(e) in the short run, after
the tax is imposed, each firm would
have
a loss of $80.
Question 8
In long run equilibrium, imposing the $2 tax on
haircuts in San Barberia
would cause the price of haircuts
(a) to rise by $1.50 and the
number of barbershops to increase by 1.
(b) to rise by $1 and the
the number of barbershops to stay
constant.
(c) to rise by $2 and the
number of barbershops to stay
constant.
(d) to rise by $2 and the
number of barbershops to decrease by
1.
(e) to rise by $2 and the
number of barbershops to
decrease by 3.
Answer Key
1.
B
2.
A
3.
C
4.
D
5.
A
6.
C
7.
E
8.
D