The following are the demand and total cost schedules for Company Town Water, a
ID: 1188492 • Letter: T
Question
The following are the demand and total cost schedules for Company Town Water, a local monopoly:
Output in Gallons Price per Gallon Total Cost
50,000 $0.28 $6,000
100,000 0.26 15,000
150,000 0.22 22,000
200,000 0.20 32,000
250,000 0.16 46,000
300,000 0.12 64,000
How much output will Company Town Water produce, and what price will it charge? Will it earn profit? How much? (Hint: First compute the firm's MR and MC schedules.)
Please read the question carefully and answer ALL parts of the question and show ALL work and expalin answers.
Explanation / Answer
Output in Gallons Price per Gallon Total Cost TR
50,000 $0.28 $6,000 $14000
100,000 0.26 15,000 26000
150,000 0.22 22,000 33000
200,000 0.20 32,000 40000
250,000 0.16 46,000 40000
300,000 0.12 64,000 36000
The firm will produce 150,000 gallons, at a price of .22
b)
Profit will be 11000, the difference between TR and TC.
c)The misallocation of resources under monopoly occurs because the monopoly firm faces the entire downward sloping demand curve. With that, the monopolist can raise price by reducing quantity. To maximize profits, it sets quantity where MR=MC, and charges the price off the demand curve that is consistent with that quantity. That results in a price greater than marginal cost. Thus consumers pay more than it costs to produce the good, and the monopolist earns positive economic profits in the long run. In addition, with a monopoly, consumer surplus is smaller, producer surplus larger, and there is deadweight loss as compared to perfect competition. Finally, in the long run, the monopolist will not operate at the minimum of LR ATC.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.