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 $6 per bag no matter how many bags are produced. nstructions: 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? (Click to select) v Is this a decreasing-cost industry? (Click to select) b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge? per bag At that price, what would be the size of the firm's profit or loss? At that price, the firm's equals million

Explanation / Answer

Solution:-

(A). Here the Average total cost is never increased. Because this is a decreasing cost industry.

(B). Charge $1 per bag since the MC of all bags is $1 per bag. At that price, the firm would lose its $10 million fixed costs (since the price is just enough to cover variable costs). This firm would be losing money and will want to exit the industry.

(C). You find out that if you set the price at $7 per bag, consumers will demand 10 million bags. How big will the firm’s profit or loss be at that price?

Firm’s revenue equals = Price * Quantity

                                = $7 x 10,000,000 = $70,000,000

Firm’s Fixed Cost = $10,000,000 (given above).

Firm’s Total Variable Cost = $10,000,000 (= $1 (variable cost of producing each bag) x 10,000,000 (quantity)).

Firm’s Total Cost = Total Fixed Cost + Total Variable Cost,

$20,000,000       = $10,000,000 + $10,000,000

Firm Profit = Total Revenue – Total Cost

$50,000,000 = $70,000,000 - $20,000,000  

Firm will get profit of $50,000,000 at the given price.

(D).If consumers instead demanded 20 million bags at a price of $7 per bag, how big would the firm’s profit or loss be?

Firm’s revenue equals = Price * Quantity

                                = $7 * 20,000,000 = $140,000,000

Firm’s Fixed Cost = $10,000,000 (given above).

Firm’s Total Variable Cost = $20,000,000 (= $1 (variable cost of producing each bag) x 20,000,000 (quantity)).

Firm’s Total Cost = Total Fixed Cost + Total Variable Cost,

$30,000,000    = $10,000,000 + $20,000,000

Firm Profit = Total Revenue – Total Cost

$110,000,000 = $140,000,000 - $30,000,000  

Firm will get profit of $110,000,000 at the given price.

                                                                                     

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