Question

Consider an industry that is competitive with N firms and has the following market demand and supply. To start with, suppose there is no other relevant fact or issue at play. Thus, the market D and S looks as in this graph, Figure 1. a) Depict such a graph on your paper and indicate the following: Market price and output, the socially optimal output, the size of consumer surplus, and the size of producer surplus. b) Now, suppose that overnight a master negotiator was able to buy up every single of the N firms in that industry and form a monopoly. Again using the original graph, Figure 1 shown above, graphically depict the profit maximizing monopoly outcome including the profit maximizing output and price where MR=MC. On the same graph, draw a conventional U-Shaped Average Total Cost curve such that Profit is positive. Graphically indicate the size of profits. c) Again using the original graph, Figure 1 shown above, graphically depict the monopoly equilibrium showing the profit maximizing outcome including the profit maximizing output and price where MR=MC. Also indicate the area of Consumer Surplus, the area of Producer Surplus, and the size of Dead Weight Loss.

Answer 1

Mc. wer suubles In the diagram, equilibrium occurs at point where market price a opt and output = OQ* which is also the socially optional Output Producer surplus because D- & MC. Consumer suashes is depicted by red shaded area and broducer Surplus by black shaded area cium DAME E hice - & The monopoly equilibrium - Consumer Surbhes occurs at the point where brofits. MR= ř MC and thus equilibrium benel of output = broducer OOM and OPM is equilibrium surfhurt Deadweight brice level. Ac depicts the Me o anerage total cost curue of the firm and profits (P- Ac)-xQ Output which are depicted by red shaded area. g Monopoly equilibrium is depicted in graph aboue. Black area represents Consumer Surfhes red area represent producer Surplus and blue shaded area represents deadweight loss.