Consumers of Laundry Detergent View Brands as Different and So

question 40

Essay

Consumers of laundry detergent view brands as different and so each brand effectively has some market power.Prices are set much higher than marginal cost,yet detergent firms earn a normal rate of return.
a.Use a diagram with demand for the output of a single firm,marginal cost and average cost curves to show a monopolistically competitive firm in equilibrium.
b.Why do firms just earn a normal rate of return? That is,why do firms in this market earn zero profits?
c.Suppose that each firm in this industry was required to pay a fixed annual fee to operate (a tax that does not vary with the output of the firm).What would this tax do to the number of firms and the price each firm charges? (Using a new graph may help your argument. )

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Definitions:

Allowance Method

An accounting technique used to estimate and record bad debts expense by anticipating uncollectible accounts.

Note Receivable

A financial asset representing a written promise to receive a specific amount of money at a future date.

Dishonored Note

A promissory note that has not been paid by the maker at the time of maturity, resulting in default.

Promissory Note

A financial document in which one party promises in writing to pay a determinate sum of money to another, either at a fixed or determinable future time or on demand.