Answer to Question #288885 in Microeconomics for Saim shah

Question

Suppose you manage a local grocery store and you learn that Imtiaz super Market is about to open a store near you.

Use the model of monopolistic competition to analyze the impact of this new store on the quantity of output your store should produce (Q) and the price your store should charge (P). Note, we are assuming you each sell one representative good.

Explain how the opening of this new store may affect your business. Be sure to address what can happen to your customers, supply and demand, and prices. What will happen to your profits? Show graphically and explain your reasoning in detail.

Explain at least one strategy that could be used to defend your market share against the new store (e.g., address what you are going to do to keep your customers).

Answer 1

Opening of a new store will decrease the quantity of output your store should produce (Q) and decrease the price your store should charge (P). The number of your customers will decrease, market supply will increase, demand will stay the same, prices will decrease, and your profits will decrease.

The strategy that could be used to defend your market share against the new store is to increase differentiation of your products.