Question

Sara is a dot.com entrepreneur who has established a Web site at which people can design and buy sweatshirts. Sara pays $\$ 1,000$ a week for her Web server and Internet connection. The sweatshirts that her customers design are made to order by another firm, and Sara pays this firm $\$ 20$ a sweatshirt. Sara has no other costs. The table sets out the demand schedule for Sara's sweatshirts. $$\begin{array}{cc} \begin{array}{c} \text { Price } \\ \text { [dollars per sweatshirt/ } \end{array} & \begin{array}{c} \text { Quantity demanded } \\ \text { (sweatshirts per week) } \end{array} \\ \hline 0 & 100 \\ 20 & 80 \\ 40 & 60 \\ 60 & 40 \\ 80 & 20 \\ 100 & 0 \end{array}$$ a. Do you expect other firms to enter the Web sweatshirt business and compete with Sara? b. What happens to the demand for Sara's sweatshirts in the long run? What happens to Sara's economic profit in the long run?

          Sara is a dot.com entrepreneur who has established a Web site at which people can design and buy sweatshirts. Sara pays $\$ 1,000$ a week for her Web server and Internet connection. The sweatshirts that her customers design are made to order by another firm, and Sara pays this firm $\$ 20$ a sweatshirt. Sara has no other costs. The table sets out the demand schedule for Sara's sweatshirts.
$$\begin{array}{cc}
\begin{array}{c}
\text { Price } \\
\text { [dollars per sweatshirt/ }
\end{array} & \begin{array}{c}
\text { Quantity demanded } \\
\text { (sweatshirts per week) }
\end{array} \\
\hline 0 & 100 \\
20 & 80 \\
40 & 60 \\
60 & 40 \\
80 & 20 \\
100 & 0
\end{array}$$
a. Do you expect other firms to enter the Web sweatshirt business and compete with Sara?
b. What happens to the demand for Sara's sweatshirts in the long run? What happens to Sara's economic profit in the long run?

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Added by Laura A.

Principles of Economics

Gregory Mankiw 8th Edition

Instant Answer

Solved by Expert Andrew Davis

07/02/2022

Step 1

Step 1:** Calculate Sara's profit at different price points: - At a price of 0: Profit = 0 * 100 - 1000 = -1000 - At a price of 20: Profit = 20 * 80 - 20 * 80 - 1000 = -1000 - At a price of 40: Profit = 40 * 60 - 20 * 60 - 1000 = 200 - At a price of 60: Profit = 60 Show more…

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Sara is a dot.com entrepreneur who has established a Web site at which people can design and buy sweatshirts. Sara pays $\$ 1,000$ a week for her Web server and Internet connection. The sweatshirts that her customers design are made to order by another firm, and Sara pays this firm $\$ 20$ a sweatshirt. Sara has no other costs. The table sets out the demand schedule for Sara's sweatshirts. $$\begin{array}{cc} \begin{array}{c} \text { Price } \\ \text { [dollars per sweatshirt/ } \end{array} & \begin{array}{c} \text { Quantity demanded } \\ \text { (sweatshirts per week) } \end{array} \\ \hline 0 & 100 \\ 20 & 80 \\ 40 & 60 \\ 60 & 40 \\ 80 & 20 \\ 100 & 0 \end{array}$$ a. Do you expect other firms to enter the Web sweatshirt business and compete with Sara? b. What happens to the demand for Sara's sweatshirts in the long run? What happens to Sara's economic profit in the long run?

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Transcript

00:01 So here we are analyzing a small business run by sarah, and we are thinking about her profits, right? because the first part of this question is, do we expect other firms to enter this line of business? well, firms like profits.

00:14 So i should only expect firms to enter this line of business if profits are to be had.

00:18 So let's calculate sarah's profits at different price points.

00:21 Profit is price times quantity minus costs.

00:24 Her costs are $1 ,000 a week minus $20 per sweatshirt.

00:30 Right.

00:31 So here we have zero minus a thousand equals minus a thousand.

00:37 Now when she raises the price to $20, she gets $20 a sweatshirt.

00:42 She is losing $20 a sweatshirt because they cost $20 to produce.

00:48 She sells 80 and then she pays $1 ,000 for her website.

00:52 So this is again minus $1 ,000.

00:55 Here the profit is now she sells shirts for $20, but they cost or 20 to produce.

01:01 So she's making 20 on each shirt.

01:04 She sells 60 of them.

01:06 She has $1 ,000 for her website.

01:08 So now her profit is going to be $1 ,200 minus $1 ,000 equals $200.

01:13 At a price of 60, she sells $20 each.

01:20 She sells $40 of them, pays $1 ,000 in expenses and makes $600 in profit.

01:25 At a price of 80, she makes 80 minus 20 per shirt, sells 20 of them...

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