Suppose you have been tasked with regulating a single monopoly firm that sells 5
ID: 1223988 • Letter: S
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 $4 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? (Click to select)YesNo.
Is this a decreasing-cost industry? (Click to select)YesNo.
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)profitloss equals $ million.
Would the firm want to exit the industry? (Click to select)YesNo.
c. You find out that if you set the price at $5 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 $5 per bag, how big would the firm’s profit or loss be?
At that price, the firm's (Click to select)profitloss equals $ 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 return? Assume as always that TC includes a normal profit.$ per bag.
Explanation / Answer
Suppose few numbers of bags are taken below the level 50 and above the level 50 for understanding the fact as below:
Bags
Fixed cost (F)
Variable cost (V) = Bags × $4
TC = F + V
ATC = TC / Bags
47
30
188
218
4.64
48
30
192
222
4.63
49
30
196
226
4.61
50
30
200
230
4.60
51
30
204
234
4.59
52
30
208
238
4.58
53
30
212
242
4.57
ATC per bag is constantly decreasing as above.
a.
No, increasing output would not increase ATC per bag.
b.
Yes, this is a decreasing-cost industry, since ATC per bag kept decreasing by the increase in bags.
Bags
Fixed cost (F)
Variable cost (V) = Bags × $4
TC = F + V
ATC = TC / Bags
47
30
188
218
4.64
48
30
192
222
4.63
49
30
196
226
4.61
50
30
200
230
4.60
51
30
204
234
4.59
52
30
208
238
4.58
53
30
212
242
4.57
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