consumer advocacy groups charged at a press conference yesterday that there is w
ID: 1104362 • Letter: C
Question
consumer advocacy groups charged at a press conference yesterday that there is widespread price gouging in the sale of pencils. They released a study showing that whereas the average retail price of pencils was $1.00, the average cost of producing pencils was only $0.50. "Pencils can be produced without complicated machinery or highly skilled workers, so there is no justification for companies charging a price that is twice what it costs them to produce the product. Pencils are too important in the life of every American for us to tolerate this sort of price gouging any longer," said George Grommet, chief spokesperson for the consumer groups. The consumer groups advocate passage of a law that would allow companies selling pencils to charge a price no more than 20 percent greater than their average cost of production.
Which of the following is not likely to happen in the pencil market?
a. Firms will charge a price above marginal cost in the long run
b. in the long run, even without a law being passed, prices will be exactly equal to the average total cost of production
c. firms will return to earning zero economic profit
d. if there are economic profits in the industry, there will be entry of new firms
Explanation / Answer
THe answer is A -) Firms will charge a price above marginal cost in the long run.
because no monopolist firm will produce on the portion of the demand which gives him negative marginal revenue and thus also reduces its total revenue and so by reduced his profits also. Thus monopolist only produce that quantity and charge those price where its marginal revenue is equal to marginal cost. or Price is equal to marginal cost.
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