Suppose you have been tasked with regulating a single monopoly firm that sells 5
ID: 2494634 • 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 dollar 10 million per year and a variable cost of dollar 1 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. If this firm kept on increasing its output level, would ATC per bag ever increase? Is this a decreasing-cost industry? If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge? dollar per bag. At that price, what would be the size of the firm's profit or loss? At that price, the firm's equals dollar million. Would the firm want to exit the industry? You find out that if you set the price at dollar 2 per bag, consumers will demand 10 million bags. How big will the firm's profit or loss be at that price? Dollar If consumers instead demanded 20 million bags at a price of dollar 2 per bag, how big would the firm's profit or loss be? At that price, the firm's equals dollar million. Suppose that demand is perfectly inelastic at 20 million bags, so that consumers demand 20 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. Dollar per bag.Explanation / Answer
a. firm kept on increasing its output level, would ATC per bag ever increase? Is this a decreasing cost industry?
ATC will never increase. This is a decreasing cost industry. The intuition is that FC get distributed over more and more units so that ATC will fall asymptotically towards the $1 per bag marginal cost.
b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge? Per bag at the price, what would be the size of the firm’s profits or loss?
Charge $1per bag since the MC of all bags is $1 per bag. At that price, the firm would lose its $10 million fixed costs. This firm would be losing money and will want to exit the industry.
c. you find out that if you set the price at $2 per bag, consumer will demand 10 million bags. How big will the firm’s profit or loss be at that price?
The firm’s revenue equals $20,000,000 (=$2 (price) X 10,000,000(quantity)).
The firm’s fixed cost equals $10,000,000 (given above).
The firm’s total variable cost equals $10,000,000 (=$1 (variable cost of producing each bag) X 10,000,000 (quantity)
The firm’s total cost equals the sum of total fixed cost and total variable cost, $20,000,000 (=$10,000,000 (total fixed cost) + $10,000,000 (total variable cost)).
The firm’s profit equals $0 (=$20,000,000 (revenue) -$20,000,000 (total cost)). The firm breaks even.
d. if consumer instead demanded 20 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___equals to $__million.
The firm’s revenue equals $40,000,000 (=$2 (price) X 20,000,000 (quantity).
The firm’s fixed cost equals $10,000,000 (given above).
The firm’s total variable cost equals $20,000,000 (=$1 (variable cost of producing each bag) X 20,000,000 (quantity).
The firm’s total cost equals the sum of total fixed cost and total variable cost, $30,000,000 (=$10,000,000 (total fixed cost) + $20,000,000 total variable cost)).
The firm’s profit equal $10,000,000 (=$40,000,000 (revenue) - $30,000,000 (total cost)).
e. Suppose that demand is perfectly inelastic at 20 million bags, so that soncumers demand 20 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.
First we have to find out the total cost.
The firm’s fixed cost equals $10,000,000 (= $1 (variable cost of producing each bag) X 20,000,000 (quantity)).
The firm’s total cost equals the sum of total fixed cost and total variable cost, $30,000,000 (= $10,000,000 (total fixed cost) + $20,000,000 (total variable cost)).
Next second step is to find revenue (here the price is not known).
Revenue = price (unknown) X 20,000,000.
Finally we have to use lthe definition of profit to solve for the unknown price.
Profit = revenue – total cost = price X 20,000,000 - $30,000,000
We can also set profit to zero (fair rate of return requirement):
Price X 20,000,000 - $30,000,000=0
Or
Price X 20,000,000 = $30,000,000 which gives us,
Price = $30,000,000/20,000,000 = $1.50.
Thus, the firm should charge $1.50 per bag to earn a fair rate of return.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.