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 $6 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)   Yes   No

     Is this a decreasing-cost industry?

       (Click to select)   Yes   No

b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge?

___ per bags

     At that price, what would be the size of the firm’s profit or loss?

At that price, the firm's ___ equals ___ million

     Would the firm want to exit the industry?

       (Click to select)   Yes   No

c. You find out that if you set the price at $7 per bag, consumers will demand 30 million bags. How big will the firm’s profit or loss be at that price?

Answer: ___

d. If consumers instead demanded 40 million bags at a price of $7 per bag, how big would the firm’s profit or loss be?

At that price, the firm's ___ 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.

Answer: ___ per bag

Answer 1