Hank's Clothing Emporium sells Good A in a perfectly competitive market with a downward-sloping demand curve and an upward-sloping supply curve. The market price is $60 per unit. a) Calculate the average fixed cost of producing 5 units. Show your work. b) Identify the profit-maximizing quantity. Explain using marginal analysis. c) Calculate the economic profit at the profit-maximizing quantity you identified in part (b). Show your work. d) Based on your answer in part (c), will the number of firms in the industry increase, decrease, or stay the same in the long run? Explain. e) Based on your answer to part (c), will the market price increase, decrease, or stay the same in the long run? Explain. f) The income elasticity of demand for Good A is – 2, and the cross-price elasticity of demand for khaki pants with respect to the price of Good A is 0.8. Based on your answer to part (e), what will happen to the demand for khaki pants? Explain. g) Now assume that the market in which Hank's Clothing Emporium operates is in long-run equilibrium. i. Suppose the rent paid by Hank's Clothing Emporium increases. Will Hank's Clothing Emporium's profit-maximizing quantity of Good A increase, decrease, or stay the same in the short run? Explain. ii. Instead suppose Hank's Clothing Emporium hires labor in a perfectly competitive market and the market wage decreases. Will Hank's Clothing Emporium's profit-maximizing quantity of Good A increase, decrease, or stay the same in the short run? Explain.
