1. As price moves from $15 to $10, quantity demanded increases from 4000 units t
ID: 1228180 • Letter: 1
Question
1. As price moves from $15 to $10, quantity demanded increases from 4000 units to 6000 units. What is the elasticity of demand? (Use the mid-point formula).
2.Assume a monopolist is not able to practice price discrimination. The monopolist sets output at the level corresponding to the point where marginal cost cuts marginal revenue from below. Assume the monopolist can earn a positive economic profit. What cost should the monopolist subtract from price to determine the average economic profit per unit?
3.Why is the perfectly competitive firm’s demand curve horizontal?
4.A perfectly competitive firm faces a price that lies between its average cost and its average variable cost. Should it shut down in the short run? Explain your answer.
Explanation / Answer
1. P1 = $15 P2 = $10
Q1 = 4000 Q2 = 6000
PED = Q/P *( P1 + P2 /Q1 + Q2)
= 2000 / -5 * 25 / 10000
= - 1
2. The monopolist should subtract Average Total Cost from price to determine the average economic profit per unit.
3. In a perfectly competitive market, pice is determined by the demand and supply force in the market. Since, all firms are price takers, they have to accept the price which is determined in the market. The firms sells any quantity of good at this price. That's way the demand curve is horizontal.
4. No. it should not shut down. As long as the price is sufficient to cover AVC, the should not shut down.
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