HW Chap7

1. How does a competitive firm determine its profit-maximizing level of output? Explain.
When does a
profit-maximizing competitive firm decide to shut down? When does it decide to exit a market?
By determining the amount of output when marginal revenue equals marginal cost. Profit will grow if the
business increases Q if MR > MC. If MR MC, profit will rise if the business reduces Q.
When the price is less than the average variable cost. The departure choice is a long-term decision in
which the business has no chance of covering its production costs.
2. In the long run with free entry and exit, is the price in a market equal to marginal cost, average total
cost, both, or neither? Explain.
=> Profits are pushed to zero in a market with unfettered entrance and exit in the long term. In the long
term, all businesses produce at the efficient scale, the price equals the minimal average total cost, and
the number of firms adjusts to meet the amount requested at this price.
3. A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10.
What is the average revenue, and how many units were sold?
=> $10 and 50
4. Suppose that each firm in a competitive industry has the following costs:
Total cost: TC = 50 + 0.5q2
where q is an individual firm’s quantity produced. The market demand curve for this product is
Demand: QD = 120 - P
where P is the price and Q is the total quantity of the good. Currently, there are 9 firms in the market.
FC= thế 0 vào Tc = 50+0.5Q 2=> 50
MC= TC’= q
VC= 0.5 q^2
ATC= TC/ q= 50/q +0.5q
To maximise total profit, firm sets q where MC=P=(MR)
MC=q= P Firm supply curve
Qm
Qm=9q  q= =P Market’s S
9
SHORT RUN
Q D=120− p=Q s=9P
P = 120/10=12
Firm’s q s =q = 12
Firm’s profit
π=¿ Px q – TC
= 12 x 12- 50 – 0.5(122) = 22
π > 0: call for enter

LONG RUN:
π -> 0
 P = AT C m ¿
ATC -> min
 ATC’ = 0
−50
2
+ 0 ,5=0 => q= 10 => P= 10 (q=P)
q
D 5
Q =Q = 120 – P= 110
Qm 110
n= = = 11
q 10
50
=> ATCmin = + 0.5 x 10= 10 =P
10
5. What are the three reasons that a market might have a monopoly? • Give two examples of
monopolies and explain the reason for each.
=> Because a single company controls a crucial resource, because the government has granted it the only
right to create a certain commodity, or because a single producer is more cost-effective than many
producers, a market may have a monopoly.
Examples of monopolies include the water producer in a small town who controls a vital resource, the
sole well in the community; the pharmaceutical company granted a government-issued patent on a
brand-new drug; and the bridge, which is a natural monopoly because (if the bridge is clear of traffic)
having just one bridge is effective.
6. Explain how a monopolist chooses the quantity of output to produce and the price to charge. How
does a monopolist’s quantity of output compare to the quantity of output that maximizes total
surplus? How does this difference relate to the deadweight loss?
 By determining the quantity at which marginal income and marginal cost are equal, a monopolist
may decide how much production to generate. It determines the price to charge by locating the
demand curve point that corresponds to that amount.
 The amount of output produced by a monopolist is smaller than the amount of production that
maximizes total surplus because it creates output at the point where marginal cost equals
marginal revenue as opposed to the point when marginal cost equals price.
7. Describe the ways policymakers can respond to the inefficiencies caused by monopolies. List a
potential problem with each of these policy responses.
One of four approaches is available to policymakers to address the inefficiencies brought on by

monopolies:
(1) by attempting to increase the level of competition in monopolized industries
(2) by regulating the conduct of the monopolies
(3) by converting some private monopolies into public businesses
(4) by taking zero action.
Antitrust rules forbid major company mergers and forbid them from cooperating in ways that reduce
market competition, but they may also hinder firms from combining and creating synergies that boost
efficiency. The government regulates some monopolies, particularly natural monopolies, but it is
challenging to maintain a monopoly in operation, achieve marginal-cost pricing, and provide the
monopolist with a motivation to cut expenses. Governments have the ability to take over private
monopolies, but the organizations are unlikely to be effectively administered. The wisest course of action
may occasionally seem to be doing nothing at all, but monopoly will undoubtedly result in deadweight
costs for society.
8. Only one firm produces and sells soccer balls in the country of Wiknam, and as the story begins,
international trade in soccer balls is prohibited. The following equations describe the monopolist’s
demand, and total cost:
Demand: P = 10 - Q
Total Cost: TC = 3 + Q + 0.5 Q2
where Q is quantity and P is the price measured in Wiknamian dollars.
a. How many soccer balls does the monopolist produce? At what price are they sold? What is the
monopolist’s profit?
=> MC = MR
10 – 2Q = 1 + Q
3Q = 9 => Q =3
P = 10 – Q = 10 – 3 = 7
Profit= (P x Q) – (3 + Q + 0.5Q 2) = (7 x 3) – (3 + 3 + 0.5(32)) = 21 – 10.5= 10.5

b. One day, the King of Wiknam decrees that henceforth there will be free trade—either imports or
exports—of soccer balls at the world price of $6. The firm is now a price taker in a competitive market.
What happens to domestic production of soccer balls? To domestic consumption? Does Wiknam
export or import soccer balls?
=> MC = MR
10 – Q = 1 + Q 2 Q = 9
Q = 4.5
P = 10 – 4.5 = 5.5
Domestic production increases to 5, domestic consumption increases to 4 and exports would be 1 soccer
ball
c. In our analysis of international trade in Chapter 9, a country becomes an exporter when the price
without trade is below the world price and an importer when the price without trade is above the
world price. Does that conclusion hold in your answers to parts (a) and (b)? Explain.
This is not true, because domestic prices in chapter 9 are completely different from those in chapter 9. In
this chapter, it is exclusive

HW Chap7

Uploaded by

Copyright:

Available Formats

HW Chap7

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

HW Chap7

Uploaded by

Copyright:

Available Formats

1. How does a competitive firm determine its profit-maximizing level of output? Explain.

=> $10 and 50

Total cost: TC = 50 + 0.5q2

FC= thế 0 vào Tc = 50+0.5Q 2=> 50

VC= 0.5 q^2

ATC= TC/ q= 50/q +0.5q

To maximise total profit, firm sets q where MC=P=(MR)

MC=q= P Firm supply curve

Q D=120− p=Q s=9P

π > 0: call for enter

ATC -> min

One of four approaches is available to policymakers to address the inefficiencies brought on by

(1) by attempting to increase the level of competition in monopolized industries

(2) by regulating the conduct of the monopolies

(3) by converting some private monopolies into public businesses

(4) by taking zero action.

Total Cost: TC = 3 + Q + 0.5 Q2

where Q is quantity and P is the price measured in Wiknamian dollars.

Profit= (P x Q) – (3 + Q + 0.5Q 2) = (7 x 3) – (3 + 3 + 0.5(32)) = 21 – 10.5= 10.5

You might also like