South-Western College Publishing - Economics  
Uncuffed Expansion for Long-Cuffed Sweatshirts
Subject Comparative Statics
Topic Monopolistic Competition
Key Words Business, Gross Earnings, Sales, Price, Patent
News Story

In 1995, two brothers started a business called Handcuffs Sweatshirts which produces sweatshirts with sleeves that cover most of the hand and have thumbholes, but which can be rolled back to create a conventional sweatshirt cuff. These are ideal for sports enthusiasts who want to be warm without losing their sense of touch, and for children who might lose gloves.

From selling the sweatshirts at a mall kiosk during the 1995 Christmas season, and making about $100,000 in gross earnings the first year, the brothers advanced to a small store and advertised on local television. Their big break came when they were advertised in J.C.Penney's catalog. They now make gross earnings of $10-million a year and sales have quadrupled each year. J.C. Penney has just placed an $8.5-million order.

It has not always been easy. In the early days, the brothers decided to diversify and produce a line of T-shirts and hats, but the venture failed and they were forced out of business for a while. The future looks bright, however, and the sweatshirt is now patented. The brothers also believe that people regard this type of sweatshirt as a staple, not a fad.

(Updated January 1, 1999)

Questions

1. a) Why is the sweatshirt industry monopolistically competitive?
  b) Why might consumers have loyalty to the Handcuffs brand?
  c) What are the implications for the slope of the demand curve for Handcuffs Sweatshirts? Explain your answer.
2. a) Draw a diagram showing Handcuffs Sweatshirts' demand and marginal revenue curves, and its magrinal and average total cost curves. Mark the equilibrium price and quantity. Shade in the amount of profit.>/td>
  b) Show the effect of advertising on the demand curve and the marginal revenue curve. What happened to the equilibrium price and output and the amount of profit?
3. a) Draw another diagram of the equilibrium of Handcuffs' Sweatshirts.
  b) Assuming that the costs of the new lines were attributed to the sweatshirt business, how were the cost curves affected? Why? Be careful: bear in mind that the cost of each extra sweatshirt was not affected.
  c) On your diagram, illustrate the implications for the equilibrium price, output, and profit of the business.

Source Christine Hanley, "'Handcuffs Sweatshirts' unbounded growth", Cincinnati Enquirer, November 22, 1998

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