6. Changes in demand and monopoly profits Aa Aa You have just been hired to mana

Question

6. Changes in demand and monopoly profits Aa Aa You have just been hired to manage the product quality of wool socks made by WarmFeet Inc., the sole producer of wool socks in the imaginary economy of Freezetown. The graph that follows shows the demand curve, marginal revenue curve (MR), and marginal cost curve (MC that WarmFeet Inc. currently faces On the following graph, use the black point (X symbol) to indicate the profit-maximizing price and quantity if WarmFeet Inc. incurs a marginal cost of MC1. Dashed lines will automatically extend to both axes PRICE (Dollars per pair of socks) 20 18 Original Profit Max New Demand 14 Deman 12 10 MR New MR New Profit Max MC 2 46 810 12 14 16 18 20 QUANTITY Pairs of socks per monthHelp Clear All Now suppose an increase in the popularity of wool has increased consumers' willingness to pay for wool socks by $6 for each quantity of socks demanded. Use the purple line (diamond symbols) to graph the new market demand curve after the increase in demand, then use the red line (cross symbols) to plot the new MR curve. Place the grey line (star symbols) at the new profit maximizing price and quantity True or False: Because marginal cost is higher at the new equilibrium output, we cannot determine whether overall profit will rise or fall as a result of the increase in demand O False True

Explanation / Answer

The profit maximizing quantity is where MC=MR and this is at a quantity of 6 units at a price of $8/ pair of socks.

The demand curve will shift rightwards by $6 and so the new equilibrium will be at 8 units of output and a price of $4/unit.

The overall profit can be determined by total revenue minus total cost. So this is False.

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