show how you derived your answer 1. (15 points) Why is marginal revenue equal to
ID: 2601215 • Letter: S
Question
show how you derived your answer 1. (15 points) Why is marginal revenue equal to price in a competitive market? Why is marginal revenue less than price in a monopoly market? Why, in a compet itive market, does a firm produce up to the point that price equals marginal cost? 2. (20 points) Yesterday Congress passed a tax bill that, among other things, raised the effective tax rate on owning a home. Suppose that prior to the passage of the tax increase, the demand and supply for housing can be described by the following equations: Demand: Qa 2000 10P Supply: Qs = 300 + 5P What is the equilibrium price and quantity? a. b. Suppose the tax bill effectively imposes a tax of $20 per house. What price will the buyer pay after the tax is imposed? What amount per unit will the seller receive? Explain why the $20 tax was not split evenly between the buyer and seller. c.Explanation / Answer
As per policy, we can answer only one question, so answering 1 & its parts :
1)
a) In competitive market, price can only be equal to marginal revenue. Price equals MR, in perfect competition, because the demand curve in the market is horizontal and it does not change how much we produce, we have to sell it at the same price, which equals marginal revenue.
b) In a monopoly market, there exist a price effect, where we must have to reduce price to sell any additional unit of output. Thus, the marginal revenue, on any additional unit such sold, is lower than the price.
c) In the competitive market, the firm is the acceptor of the market price and to maximise the profit firm has to choose the output level where price or marginal revenue. All other things being equal, for a perfect competive firm, in short run, price is equal to marginal cost or P = MR = MC. Thus, a firm will keep producing as long as its average variable costs or marginal cost do not exceed the market price to maximise its profit.
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