Question

Table: Demand and Total Cost Table: Demand and Total Cost Quantity Price per (megawatts) Megawatt Total Cost $550 $1.000 500 1.075 450 1.200 1.375 350 1.600 300 1.875 250 2200 2.575 400 200 Use Table: Demand and Total Cost. Lenoia runs a natural monopoly firm producing electricity for a small mountain village. The table shows Lenoia's demand and total cost of producing electricity. The profit-maximizing quantity of electricity for her to produce is megawatts. O2 os

Answer 1

Q1.

Quantity (MW)	Price per MW	Total Revenue	Marginal Revenue	Total cost	Marginal Cost
1	550	550	550	1000	-
2	500	1000	450	1075	75
3	450	1350	350	1200	125
4	400	1600	250	1375	175
5	350	1750	150	1600	225
6	300	1800	50	1875	275
7	250	1750	-50	2200	325
8	200	1600	-150	2575	375

The profit-maximizing quantity is the output at which the marginal cost equals the marginal revenue or the maximum output up to which the marginal cost remains less than or equal to the marginal revenue.

From the above table, we observe that the marginal cost remains less than or equal to the marginal revenue up to a quantity of 4 MW.

Ans: 4

Q2. The profit-maximizing quantity is the output at which the MC and MR curves intersect. From the graph, we observe that the quantity at which the MC = MR is Q2 units.

When Q = Q2 units, the ATC = P3 and Price = P2. Therefore, Profit = (Price - ATC) * Quantity = (P2 - P3) * Q2

Ans: earn a profit equal to the area (P2-P2)Q2

Q3. When a monopoly is regulated such that it earns zero economic profit, the quantity produced is corresponding to the point of intersection of the ATC curve and the demand curve.

From the graph, we observe that the quantity at the point of intersection of the ATC and the demand curve is Q4 units and the corresponding price is P3.

Ans: Q4; P3

Q4. The shift of the total product curve from a lower level TP1 to a higher level TP2 indicates either

a. an increase in the physical capital per worker (fixed inputs) or

b. an increase in the productivity of workers or

c. an increase in the level of technology.

Ans: The firm employed more of a fixed input in the long-run.