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 $30 million per year and a variable cost of $1 per bag no matter how many bags are produced nstructions: Enter your answers as whole numbers. In part e, round your answer to 2 decimal places. a. If this firm kept on increasing its output level, would ATC per bag ever increase? (Click to select) Is this a decreasing-cost industry? (Click to select) b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge?$ per bag At that price, what would be the size of the firm's profit or loss? At that price, the firm's (Click to select)equals s 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 30 million bags. How big will the firm's profit or loss be at that price? $ d. If consumers instead demanded 40 million bags at a price of $2 per bag, how big would the firm's profit or loss be? At that price, the firm's(Click to select) equalsmilion million. e. Suppose that demand is perfectly inelastic at 40 million bags, so that consumers demand 40 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 returm? Assume as always that TC includes a normal profit.S per bag

Explanation / Answer

(a) If this firm kept on increasing its output level , ATC will never increase. Because ATC= TC/Q . This is a decreasing cost industry.

(b) If we wish to regulate this monopoly by charging the socially optimal price, then this would be equal to marginal cost = $1 per bag.. At that price, the firm would lose its fixed cost of $30 million per year. This firm is incurring loss and will want to exit the industry.

(c) If the price is at $2 per bag, consumers will demand 30 million bags. There will be no profit and loss. Because when P=$2 per bag , then total revenue = $(30)(2)= $60 million . And total cost = Fixed cost + variable cost = $(30 million) + (1)(30)million = $60 million. Hence, there is no profit or loss. The firm is at breakeven.

(d) If consumers instead demanded 40 million bags at a price of $2 per bag , Total revenue = $(40 million)(2) = $ 80 million. Total cost = $(30 million) + (1)(40 million) = $ 70 million.  

At that price, the firm's profit = TR - TC = $(80-70) million = $10 million.

(e) Suppose that demand is perfectly inelastic at 40 million bags , so that consumers demand 40 million bags no matter what the price is. If we want the firm to earn only a fair rate of return , then we should charge = $1.75 per bag.

Because fair return implies that set profit equals to 0.

Profit = P(Q) - TC

0 = P(40 milion) - (30 million + 40 million)

0 = P ( 40 million) - 70 million

P = $1.75

Thus, the firm should charge $1.75 per bag to earn a fair rate of return.

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