1. (25 total points). You are given the following information about the costs of
ID: 1098775 • Letter: 1
Question
1. (25 total points). You are given the following information about the costs of a perfectly competitive firm.
Quantity
TFC
TVC
0
45
0
1
45
20
2
45
35
3
45
45
4
45
75
5
45
120
6
45
180
You are hired to determine the profit-maximizing quantity of the firm for different market prices. Complete the table below.
Market Price
Profit-maximizing level of output
Total Revenue
Total Cost
Profit
$14
$18
$44
$53
$70
2. (14 points) The short-run supply curve of a perfectly competitive firm is the firms marginal cost curve.
Carefully explain the two exceptions to the statement above.
3. (21 points) Suppose that, in a perfectly competitive market at the profit-maximizing quantity, the market price is greater than average total cost. Carefully explain what will happen to the number of firms, the market supply, and the price of the good as we move from the short run to the long run.
4. (40 total points) Suppose a monopolist faces the following demand curve:
P = 596 6Q. Marginal cost of production is constant and equal to $20, and there are no fixed costs.
a) (8 points) What is the monopolists profit-maximizing level of output?
b) (8 points) What price will the profit-maximizing monopolist charge?
c) (8 points) How much profit will the monopolist make if she maximizes her profit?
d) (8 points) What would be the value of consumer surplus if the market were perfectly competitive?
e) (8 points) What is the value of the deadweight loss when the market is a monopoly?
Quantity
TFC
TVC
0
45
0
1
45
20
2
45
35
3
45
45
4
45
75
5
45
120
6
45
180
Explanation / Answer
2).
Firstly, A competitive firms, SRSC (short run supply curve) is part of the MC (marginal cost) curve. The section i.e above graph of average VC (variable cost) curve is the part of this curve.
a).It is the right part of the MC curve from the point where Price = minimum average variable cost or is also known as shut down point, it is not the part of its left hand side.
Secondly, In short run, a competitive firm will always produce an output at a price that matches the marginal cost Perfectly, As this SRSC makes the perfect MR curve, this creates the equal MC curve since MC = MR
b). Average total cost less steeper than this curve, this curve is upward sloping.
3).
If we will go from a short run situation to a long run situation, from a situation where Market Price > Average Total cost, as Price > ATC, firm will earn profit, and it will lure more firm to enter into the market, Due to which More firms will enter into the market, this will cause increase in market supply of the products, which will initiate a Price war among the firm, due to which price will start falling, more firms will keep entering the market until Price will be equal to Long run Average Total cost ( P = LRATC), at that point, no firm will earn profit and new firms will stop entering the market.
At long run Profit of each firm will be zero for each firm
4).
a). What is the monopolists profit-maximizing level of output?
P = 596-6Q
MC = $20
Revenue = PQ = 596Q-6Q^2
MR = 596-12Q ( differentiation of above eqn)
at profit amximization,
MR = MC
596-12Q= 20
Q = (596-20)/12 = 48 units
b). What price will the profit-maximizing monopolist charge?
Price charged at this quantity = P = 596-6Q = 596-6*48 = $308
c).How much profit will the monopolist make if she maximizes her profit?
Profit = Revenue-cost
Revenue = 596-6Q^2
cost = MC*Q ( as there is no Fixed cost)
Profit = 596*48-6*48*48-20*48 = $13824
d). What would be the value of consumer surplus if the market were perfectly competitive?
Price at Q = 0
Price = 596 at Q = 0
Price at equilibrium = 308
consumer surplus = (1/2)*48*(596-308) = $6912
e). What is the value of the deadweight loss when the market is a monopoly?
to calculate DWL
at monopoly, eqm price and qty are,
P = 308, Q = 48
compare it with pure competition
at perfect competition,
P = MC = 20 = 596-6Q
Q = (596-20)/6 = 96
P = 596-6*96 = $20
DWL = (1/2)*(308-20)*(96-48) = $6912
Quantity TFC TVC TC profit@14 profit@18 profit@44 profit@53 profit@70 0 45 0 45 -45 -45 -45 -45 -45 1 45 20 65 -51 -47 -21 -12 5 2 45 35 80 -52 -44 8 26 60 3 45 45 90 -48 -36 42 69 120 4 45 75 120 -64 -48 56 92 160 5 45 120 165 -95 -75 55 100 185 6 45 180 225 -141 -117 39 93 195Related Questions
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