Shower Power, Inc., a firm in monopolistic competition, produces shower radios. The company's economists know that it can sell no radios at $80, and for each $10 cut in price, the quantity of radios it can sell increases by 50 a day. This relationship continues to hold until the price falls to $20. The firm's total fixed cost is $3,000 a day. Its marginal cost is constant at $20 per radio. Shower Power's managers are considering some quality improvements in their shower radios, which would raise the firm's total fixed cost by $200 per day and double its marginal cost. Shower Power's economists report that if the firm undertakes these quality improvements, from the demand relationship given above Shower Power will be able to increase the quantity of radios sold by 20 percent at each price.
a) Draw the new demand curve faced by the firm and its new marginal revenue curve. Draw Shower Power's new marginal cost and new average total cost curves.
b) With no quality improvements, what quantity of radios maximizes Shower Power's profit? What is the profit-maximizing price? What is the firm's economic profit?
c) If Shower Power undertakes the quality improvements, what quantity of radios should it sell to maximize its profit? What is the profit-maximizing price? What is its economic profit?
d) Should Shower Power implement the quality improvements? Why or why not?

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The Answer of Shower Power, Inc., a firm in monopolistic competition, produces shower radios. The company's economists know that it can sell no radios at $80, and for each $10 cut in price, the quantity of radios it can sell increases by 50 a day. This relationship continues to hold until the price falls to $20. The firm's total fixed cost is $3,000 a day. Its marginal cost is constant at $20 per radio. Shower Power's managers are considering some quality improvements in their shower radios, which would raise the firm's total fixed cost by $200 per day and double its marginal cost. Shower Power's economists report that if the firm undertakes these quality improvements, from the demand relationship given above Shower Power will be able to increase the quantity of radios sold by 20 percent at each price.
a) Draw the new demand curve faced by the firm and its new marginal revenue curve. Draw Shower Power's new marginal cost and new average total cost curves.
b) With no quality improvements, what quantity of radios maximizes Shower Power's profit? What is the profit-maximizing price? What is the firm's economic profit?
c) If Shower Power undertakes the quality improvements, what quantity of radios should it sell to maximize its profit? What is the profit-maximizing price? What is its economic profit?
d) Should Shower Power implement the quality improvements? Why or why not?