Question

Nutty Nuts is a monopolistic firm in the market for nuts. The following equations describe the demand for, and the cost of producing nuts, where Q is output in thousand pounds, and P is price per pound. Demand: P = 31 - 30 Marginal Cost: MC = 3+ Q Total Cost: TC = 3 + 3Q +0.502 Consider that after filing for bankruptcy and engaging in a legal battle with neighboring landowners, the government decides to dissolve the monopolist, and the market becomes competitive. Given the perfectly competitive market outcome, one would expect that in the long run, the market price and the number of firms in the market will both increase. the market price will decrease but the number of firms will increase . the market price and the number of firms in the market will both decrease. the market price will increase but the number of firms will decrease.

Answer 1

Question 1

P = 31 - 3Q

Total Revenue TR = P*Q = 31Q - 3Q2

MR = dTR / dQ = 31 - 6Q

In monopoly, MR = MC at equilibrium

31 - 6Q = 3 + Q

7Q = 28

Q = 4

P = 31 - (3*4)

P* = 19 : Monopoly Price

In perfect competition, P = MC at equilibrium

31 - 3Q = 3 + Q

4Q = 28

Q = 7

P* = 31 - 3*7

P* = 10

Perfect Competition price = $10

Monopoly Price = $19

Hence, if the government decides to dissolve the monopolist, then price decreases from 19 to 10.

Since, in price competition, there are large numbers of buyers and sellers and there are no restrictions of the entry of new firms in the industry, in the long the number of firms will surely rise.

2nd option is correct

Question 2

As calculated in the previous part, Monopolist will charge P = $19

Profit = (P - MC)*Q

= (19 - 3 - 4)*4

= $48

Question 3

In perfect competition, P = MC at equilibrium

31 - 3Q = 3 + Q

4Q = 28

Q* = 7

P* = 31 - 3*7

P* = 10

Perfect Competition price = $10

2nd option is correct

Question 4

131 P When Q = 4 A 19 MC MC=3+Q = 374 = 7 7. so 3 AAR FMR b 67 10.33 02 Deadweight loss = Area of DABC Ź x 19-7) X (7-4) = $ 18 3rd option is correct

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