This is microeconomics. Please write graphs and explanation.
Suppose the monopolistically competitive barber shop industry in a community is in long-run equilibrium, and that the typical price is $20 per haircut. Moreover, the population is rising.
- Illustrate the short-run effects of a change on the price and output of a typical firm in the market.
- Show what happens in the long run. Will the final price be higher than $20? Equal $20? Be less than $20? Assume that nothing happens to the cost of producing haircuts.
- Suppose that, initially, the price of a typical children’s haircut is $10. Do you think this represents price discrimination? Why or why not?
Consider the same industry as in Problem 1. Suppose the market is in long-run equilibrium and that an annual license fee is imposed on barber shops.
- Illustrate the short-run effects of the change on the price and output of haircuts for a typical firm in the community.
- Now show what happens to price and output for a typical firm in the long run.
- Who pays the fee in the long run? How does this compare to the conclusions of the model of perfect competition?