There is only one least-cost way to make wooden boxes for shipping tomatoes, and

Question

There is only one least-cost way to make wooden boxes for shipping tomatoes, and any firm that makes them has a cost function given by 2 TC q q = + + 200 .005 .The inverse market demand for boxes is given by P Q = ? 10 .005 . There is currently only one firm in the industry and it is able to act as a monopolist. (a) What is its output and what price does it charge for boxes? (b) What is the firm's profit at this output level? (c) Does the firm have any producer's surplus? Support your answer by calculating it. (d) What is the magnitude of consumer's surplus in this situation? 3. Suppose now that the firm in problem 2 can no longer exclude others from using the same technology and producing boxes, so the market structure changes from monopoly to perfect competition. (That is, assume that all firms produce at minimum average cost in equilibrium.) (a) What will the market price and quantity be? (b) What is the magnitude of consumer's surplus under this market structure? (c) What are the magnitudes of aggregate producer profits and producer's surplus? (d) Comparing the two market structures for this industry, which has a larger social surplus (sum of producer's and consumer's surplus)?

Explanation / Answer

In mainstream economics, economic surplus (also known as total welfare or Marshallian surplus after Alfred Marshall) refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay. Producer surplus or producers' surplus is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for. In some schools of heterodox economics, the economic surplus denotes the total income which the ruling class derives from its ownership of scarce factors of production, which is either reinvested or spent on consumption. In Marxian economics, the term surplus may also refer to surplus value, surplus product and surplus labour.

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