Attempts Average:14 4 Monopoly outcome versus competition outcome Consider the d
ID: 1114106 • Letter: A
Question
Attempts Average:14 4 Monopoly outcome versus competition outcome Consider the daily market for hot dogs in a small city. Suppose that this market is in long- run competitive equilibrium with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power The following graph shows the demand (D) and supply (S-MC) curves in the market for hot dogs. Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from competition. Competitive Narket PC Outoome 3.5 3.0 2.5 2.0 0 0 100 150 200 250 300 350 400 450 00 QUANTITY (Hot dogs) Assume that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the new monopoly's marginal-cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal-revenue (MR), and marginal-cost (MC) curves for the monopoly firm. Place the black point (plus symbol) on the following graph to indicate the profit- maximizing price and quantity of a monopolist.Explanation / Answer
graph i
Market price and quantity is given by the intersection of demand curve and supply curve
so Market quntity Q = 250
Market price P = 1.5
graph ii)
profit maximising condition for monopoly
MR = MC
MC is rising
So profit maximising Q = 150
P = 2.5
iii)
Market structure P Q
cometitive 1.5 250
monopoly 2.5 150
so we can infer that price is higher under monopoly and quantity is higher under competitive market
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