Question

Part 1

Price 19 18 МС 17 16 15 14 13 12 11 АТС 10 9 7 5 4 3 +> Оиаntity + + 4 5 6 7 3

Suppose a firm operating in a competitive market has the following cost curves:

a. If the market price is $10, what is the firm’s economic profit?
b. If the market price is $10, what is the firm’s total cost?
c. If the market price is $10, what is the firm’s total revenue?
d. The firm will earn zero economic profit if the market price is
e. If the market price is $4, what is the firm’s decision in the Short run and long run?

Part 2.

Monopoly

a. If the monopoly firm is not allowed to price discriminate, then consumer surplus amounts to _______________________________

b. If the monopoly firm perfectly price discriminates, then consumer surplus amounts to _______________________________

c. If the monopoly firm is not allowed to price discriminate, then the deadweight loss amounts _______________________________

d. If the monopoly firm perfectly price discriminates, then the deadweight loss amounts to _______________________________

e. If there are no fixed costs of production, monopoly profit without price discrimination equals _______________________________

f. If there are no fixed costs of production, monopoly profit with perfect price discrimination equals _______________________________

Answer 1

1.

Since perfectly competitive firm short-run profit-maximising condition is

P=ATC=MC

1. If the market price is $10, the firm’s economic profit=(P-ATC)Q

=(10-7)*5

=$15

b.

If the market price is $10, the firm’s total cost=ATC*Q

=7*5

=$35

c.

P=10

Q=5

TR=10*5

=$50

d.

If firm produces at price $7, then it will be equal to ATC, so there will be zero economic profit.

e.

If price is $4, then it is below ATC, so this leads to economic loss. Hence firm should shut down in the short run.