Auto Maintenance Services (AMS) is a small auto service outlet in a suburban area of Syracuse. In reaction to a small increase in wages that has caused the marginal cost of this auto service establishment to increase from $25 to $30, the owner is considering raising the prices of the services AMS offers. The owner's daughter, who is studying economics and takes care of her father's books and finances advises him against that. She has estimated that if AMS raises its prices it will face the weekly demand curve Q = 140 - 2.5 P, whereas if it lowers its price it will face the demand curve Q'= 55-.625P.
a. Determine the (average) price AMS is charging for its services, presently.
b. Determine the number of cars it services each week.
c. Using the point price elasticity formula, calculate the elasticity measures of the demand AMS faces at its present (average) price.
d. Assuming that the owner's daughter is correct, what is the MC range within which AMS should not change its price?
e. AMS's weekly total fixed cost is $250. Assuming that the firm's marginal cost and average variable cost are equal (AVC =MC), determine its weekly profit after the wage increase.
f. What should AMS do if its MC goes up to $40? Explain.
What type of market is AMS in? Perfectly competitive, monopolistically competitive, oligopoly, or monopoly?
We are studying oligopolies and monopolistically competitive markets but my teacher didn't specify what the problem related to...
To determine the type of market in which AMS operates, we need to analyze the characteristics of different market structures.
In a perfectly competitive market, there are many firms selling identical products, and individual firms have no control over the price as it is determined by market forces. There is free entry and exit, perfect information, and no barriers to competition.
In a monopolistically competitive market, there are many firms that sell differentiated products. Each firm has some degree of control over the price as they can differentiate their products from competitors. There is some but limited competition, and barriers to entry and exit are relatively low.
In an oligopoly, there are a few firms dominating the market. Each firm has some significant control over the price. There is intense competition among the few firms, and barriers to entry and exit can be high.
In a monopoly, there is only one firm in the market, and it has complete control over the price. There are significant barriers to entry, and no close substitutes are available.
Based on the information provided, we can determine that AMS is operating in a monopolistically competitive market. This can be inferred from the fact that AMS can differentiate its services (which are not identical to competitors) and has some degree of control over pricing decisions. The presence of multiple demand curves with different elasticities also suggests a more differentiated market structure like monopolistic competition.