question
Camden's cakery is one of the many dessert cafes serving a local community. each cafe produces a slightly differentiated product, there are no barriers to entry/exit, and the firm is in long run equilibrium.
answer
draw a long run monopoly graph
question
do firms in this market (long run monopoly) experience economies of scale, dis economies of scale, or neither in long run equilibrium? explain
answer
economies of scale- long run average total cost is decreasing
question
now suppose the perfectly competitive firm is in long run perfect competition. The government gives a lump sum subsidy to each firm producing in the industry. indicate which of the following will increase, decrease, or remain the same.
firm quantity in short run
market price and quantity in the long run
firm quantity in short run
market price and quantity in the long run
answer
Q of firm will remain the same in short run, because MC isnt affected by lump sum so only FC are changed
MP goes down and Q goes up because positive profits mean new firms which increases the industry supply
MP goes down and Q goes up because positive profits mean new firms which increases the industry supply
question
where is it allocatively efficient
answer
MC = D
question
At the profit maximizing quantity from (a)(i) is the monopolist experiancing economies of scale? explain
answer
no because long run average total cost is constant as output increases
question
now assume the monopolist produces 10 units. Using the numbers given in the graph, calculate each of the following. show your work.
monopolist's economic profit
consumer surplus
deadweight loss
monopolist's economic profit
consumer surplus
deadweight loss
answer
monopolist's economic profit:
($10 - $20) x 10 = -100
consumper surplus:
1/2 ($60 - $10) x 10 = $250
deadweight loss:
1/2 ($20 - $10) x (10 - 8) = $10
($10 - $20) x 10 = -100
consumper surplus:
1/2 ($60 - $10) x 10 = $250
deadweight loss:
1/2 ($20 - $10) x (10 - 8) = $10
question
at what quantity is the demand unit elastic?
answer
6
question
suppose the monopolist perfectly price discriminates and chooses the quantity that maximizes profit. Determine the value of each.
the monopolist's profit
consumer surplus
the monopolist's profit
consumer surplus
answer
monopolists profit:
1/2 ($60 - $20) x 8 = $160
consumer surplus: zero
1/2 ($60 - $20) x 8 = $160
consumer surplus: zero
question
now assume that the monopolist can perfectly price discriminate. Using the labeling in the graph, identify the following.
quanitity produced
total revenue recieved by monopolist
quanitity produced
total revenue recieved by monopolist
answer
quantity: q3
0 P4 f Q3
0 P4 f Q3
question
instead, assume the monopolist charges a single price and is regulated to produce the socially efficient quantity. Identify:
socially efficient quantity
consumer surplus at socially efficient quantity
socially efficient quantity
consumer surplus at socially efficient quantity
answer
socially optimal quantity:
Q3
consumer surplus at socially efficient quanitity:
P1 P4 f
Q3
consumer surplus at socially efficient quanitity:
P1 P4 f
question
is the monopolist facing regulation (charging a single price) earning a positive economic profit, earning zero economic profit, or incurring a loss? explain
answer
zero economic profit because P = ATC
question
is point f in the elastic, inelastic, or unit elastic portion of the demand curve? explain
answer
inelastic because MR is negative
question
If Steverail raised the price above Pm would total revenue increase, decrease, or not change? explain
answer
decrease because demand is elastic where MR is greater than 0
question
assume a per unit subsidy is provided to Steverail
change in quantity
change in consumer surplus
change in quantity
change in consumer surplus
answer
quantity- increase because MC shifts downward so it hits MR at a larger quantity
consumer surplus- increase
consumer surplus- increase
question
assume a lump-sum subsidy is provided to Steverail. For short run,
change in deadweight
change in economic losses
change in deadweight
change in economic losses
answer
change in deadweight: doesnt change because lump sum doesnt change profit maximizing point
change in economic losses: decrease
change in economic losses: decrease
question
when the output is $8, what is the profit per unit?
answer
$6
question
assume that the monopolist is maximizing profit. is allocative efficiency achieved? explain
answer
no because MC does not equal D
question
assume regulators set an output of 11 units
earning a positive economic profit? explain
earning positive accounting profit?
earning a positive economic profit? explain
earning positive accounting profit?
answer
no, P = ATC
yes
yes
question
assume that regulators impse a price ceiling of $22.
marginal revenue for 8th unit?
quantity will be produced?
marginal revenue for 8th unit?
quantity will be produced?
answer
$22
9 units
9 units
question
assume instead that the monopolist practices perfect price discrimination (also called first degree price discrimination).
what quantity will be produced?
value of consumer surplus?
what quantity will be produced?
value of consumer surplus?
answer
10
0
0
question
at a price of $1, is the municipality's accounting profit positive, negative, or zero? explain
answer
zero because
profit = TR - explicit + implicit costs
profit = TR - explicit + implicit costs
question
suppose that the municipality sets a break even price that generates revenues to just cover all economic costs.
determine break even point
relatively or perfectly in elastic or elastic or unit elastic
determine break even point
relatively or perfectly in elastic or elastic or unit elastic
answer
Q3
relativley inelastic
relativley inelastic
question
suppose the long run average total cost is strictly downward sloping. would it be efficient to build a second bridge? explain
answer
no because economies of scale and it would raise average total cost
question
assume that the government grants cablenow a lumps sum subsidy of 1 million. will this policy change cable now's profit maximizing quantity of cable services? explain
answer
no, has no effect on MC
question
At Qr (where it earns zero economic profit), what is the firms accounting profit?
answer
positive because it excludes the implicit costs
question
assume a new study reveals Tare external benefits assoiated with watching TV. will the socially optimal quantity of cable services be larger, smaller, or equal to Qs you identified?
answer
larger than Qs
question
what must be true in the short run for the company to continue to produce at a loss?
answer
price > AVC
question
assume now that the demand for cleaning products increases and the company is now earning short run economic profits. how does "the company's profit" change?"
answer
normal profit/zero economic profit
question
in the long run, if the company continues to produce, will it produce the allocativley efficient level of output? explain
answer
no because price is > MC
question
in the long run, will the company be operating in a reigon where economies of scale exist? explain
answer
yes, firm is producing where long run average total cost is declining
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