9. Monopoly outcome versus perfect competition outcome Consider the market for h
ID: 1200463 • Letter: 9
Question
9. Monopoly outcome versus perfect competition outcome Consider the market for hot dogs in a small city. Imagine that this market is in long-run competitive equilibrium with many hot dog stands in the city, each one selling the same kind of hot dog. Therefore, each vendor is a price taker and possesses no market power. The following graph shows the demand (D) and supply curves (S - MC) in the market for hot dogs. Determine the size of consumer surplus (CS) and producer surplus (PS) in this perfectly competitive market. Place the red point (cross symbol) on the graph to indicate the market price and quantity that will result from perfect competition (PC). Dashed drop lines will automatically extend to both axes. Use the green triangle (triangle symbols) to shade the area that represents consumer surplus, and use the purple triangle (diamond symbols) to shade the area that represents producer surplus. Note: Throughout this problem, if you decide that consumer surplus or producer surplus equals zero, you should not place the shape corresponding to that area on the graph. PRICE (Dollars per hot dogl 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.30 PC Outcome CS under PC PS under PC 0 100200 300 400 500 600 700 800 1000 QUANTITY IHat dogs per dayl Cee AL 0 P ho 144Explanation / Answer
Screenshot 1 - CS & PS shaded correctly.
CS = (1/2) x $(4.5 - 2) x 500 = (1/2) x $2.5 x 500 = $625
PS = (1/2) x $(2 - 0.75) x 500 = (1/2) x $1.25 x 500 = $312.5
Screenshot 2 - CS, PS, Deadweight loss (DWL) shaded correctly.
DWL is the brown shaded region.
Screenshot - 3
Under perfect competition, profit is maximized by equating Price with MC. This occurs at
Q = 500, Price = $2
Under monopoly, profit is maximized by equating MR with MC. This occurs at:
Q = 300, Price = $3
NOTE: You've already got all answers done correctly! Why post the question - to validate your answers?
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