Soft Soap operates in a monopolistically competitive industry producing beauty products. It is currently producing the profit-maximizing quantity of beauty products, but unfortunately, it is operating at a loss.
a. Draw a correctly labeled graph for Soft Soap and show each of the following:
i. The profit-maximizing price and output, labeled as Ps and Qs, respectively.
ii. The area of economic loss shaded accurately and completely.
b. What must be true in the short run for the company to continue to produce at a loss?
c. Assume that the demand for beauty products increases and now Soft Soap is earning short-run economic profits. Relative to this short-run situation, how does each of the following change in the long run?
i. The number of firms
ii. Soft Soap’s profits
d. In the long run, if Soft Soap continues to produce, will it produce the allocatively efficient level of beauty products? Explain.
e. In the long run, will Soft Soap be operating in a region where economies of scale exist? Explain.