Question

Economic Consulting Letter

You are the Chief Economist of Econocorp whose business is represented in the graph below.

MC ATC AVC 16 14 10 MR 15 20 25

Your job is to advise the CEO of Econocorp. Be sure to include the following items in your letter:

Is Econocorp engaged in perfect competition or is it a monopoly? How do you know? What does that mean about Econocorp's business and competition? Chapter 11 & 12

What is the profit maximizing quantity and price that Econocorp should charge its customers? What is the profit maximizing condition? Where do you find this information on the graph? Chapter 12

Is Econocorp currently making a profit? How much is their profit or loss? How can you tell? Chapter 10 & 12

If Econocorp is earning a profit in the short-run, will they be able to maintain that profit in the long-run? How? Chapter 10 & 12

When maximizing profit, is Econocorp producing a socially optimal (efficient) amount? What is the socially optimal amount of this product and socially optimal price? What is the socially optimal condition? Where can you find this on the graph? Chapter 6, 8, 12

If the government wished to minimize the deadweight loss in this market, what can they do to bring the market closer to efficiency? Chapter 12

Answer 1

It is a market situation of monopoly. Monopoly is a market situation where a single seller controls the entire supply of a product which has no close subtitles. AS a single seller controls the entiresupply, there is no difference as firm or industry. The monopolist fixes the output and price in such a way that it can earn maximum profit. The monopolist can earn maximum profit by reducing the supply and fixing a high price. If the monopolist wants to increase the sales he must reduce the price. On the other hand if the monopolist wants to fix a higher price he must reduce the supply. In other words a monopolist cannot fix a higher price and a higher quantity at a time. Average revenue curve is the demand curve of the monopolist. It slops downward. The downward sloping reveals that if the monopolist charges a high price his demand will decrease. The Marginal revenue curve of the monopolist is