(#15 in Book) Consider the market for Pop Rocks depicted in the diagram below. P
ID: 1116724 • Letter: #
Question
(#15 in Book) Consider the market for Pop Rocks depicted in the diagram below. Price (s/package) $1.00 0.10 -MC 100 Quantity of Pop Rocks (thousands of packages) If the Pop Rock industry were competitive, what would the competitive price and quantity be? If the Pop Rock industry were competitive, what would be the consumer and producer surpluses, respectively? Suppose that gangland figure Tommy Vercetti monopolizes the Pop Rock market. What price and quantity will he choose to maximize profit? Calculate the consumer and producer surplus of this Pop Rock monopoly. Compare your answers to (d) and (b). How big is the deadweight loss of monopoly? a. b. c. d. e.Explanation / Answer
a) In perfect competition price is equal to Marginal Cost . So P= .10.
b) CS = 1/2*(1-.10)*100 = 45
PS = 0
c) Monopoly will produce at point where Marginal Cost is equal to Marginal revenue .
Equation for demand
P-0 =( 0-1)/(100-0)* Q-100
100P = Q = P =.01Q
TR =.01Q2
MR = .02Q
At equilibirum
.02Q =.10 , Q = 50
P= .O1* 50 = .5
CS = 1/2 *( 1-.5)*50 = 12.5
PS = 1/2 * (.5)* 50 =12.5
e) Dead weight loss = 45- 25 = 20
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