Many thanks, Questions 1. Shaggy is the only seller of Scooby Snacks and thus ha

Question

Many thanks, Questions 1. Shaggy is the only seller of Scooby Snacks and thus has a monopoly in the production of that good. Figure below shows Shaggy's demand, marginal revenue and cost curves. Price and cost per unit MC $75 68 54 38 Demand 630 800 Quantity 880 850 MF a) If Shaggy is a profit-maximizing monopolist, what is the quantity of Scooby Snacks he will produce? What price will he charge for each bag of Scooby Snacks? b) What is the profit/loss for Shaggy at the profit maximizing output? c) If the production of Scooby Snacks was done under perfect competition industry, what would be the quantity produced? What would be the price charged under perfect competition. Compare the quantity produced and priced charged under perfect competition with that under a monopoly. Under which situation is the quantity greater? Under which situation is the price greater? d) What will happen to Shaggy the monopolist in the long-run?

Explanation / Answer

A. A monopolist maximises profit where marginal revenue curve intersects marginal cost curve. P = 68 and Q = 630

B. Price is less than average cost and hence loss = atc - p = 75-68= 7 per unit. Total loss = 7*630= 4410

C. Under perfect competition, price is same as marginal revenue and at equilibrium marginal revenue is same as marginal cost. P = 54 and q = 800.

Price is greater under monopoly while quantity is greater under perfect competition.

D. Output will increase in Long run so that average cost declines. A monopolist can increase price to come out of loss situation.

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