Suppose you have been tasked with regulating a single monopoly firm that sells 5

Question

Suppose you have been tasked with regulating a single monopoly firm that sells 50-pound bags of concrete. The firm has fixed costs of $10 million per year and a variable cost of $1 per bag no matter how many bags are produced. Instructions:Enter your answers as whole numbers. In part e, round your answer to 2 decimal places a. If this firm kept on increasing its output level, would ATC per bag ever increase? No This is a decreasing-cost industry. b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge? r bag. At that price, what would be the size of the firm's profit or loss? At that price, the firm's equa million Would the firm want to exit the industry? (Click to select: c. You find out that if you set the price at $2 per bag, consumers will demand 10 million bags. How big will the firm's profit or loss be at that price? d. If consumers instead demanded 20 million bags at a price of $2 per bag, how big would the firm's profit or loss be? At that price, the prfit equ firm's 10million. e. Suppose that demand is perfectly inelastic at 20 million bags, so that consumers demand 20 million bags no matter what the price is. What price should you charge if you want the firm to earn only a fair rate of return? Assume as always that TC includes a normal profit. s1.50 per bag

Explanation / Answer

TC = TFC+TVC = 10000000+Q

ATC = TC/Q = 1+10000000/Q. This implies as Q increases The ATC will decrease

Therefore NO, Natural Monopoly

Price =$1.

Total Revenue = P*Q = 50*1 = $50. TC =10000050

So loss = (10000050-50) = $10 million

Firm will exit the industry.

Profit = TR-TC = 0

Profit = TR-TC = 10 million

TR –TC = 0

TR =20000000P TC =30000000

20000000Q-30000000 =0, P = 3/2 = $1.5

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