Question

In: Economics

Long-run competition. Because of regulatory requirements and the cost of opening a dedicated growing facility, it is very expensive to open a retail establishment selling marijuana in Massachusetts.

Long-run competition. Because of regulatory requirements and the cost of opening a dedicated growing facility, it is very expensive to open a retail establishment selling marijuana in Massachusetts. Once the growth facility and the store are opened, product flies off the shelves and more can be grown and sold relatively cheaply.

a) (1 point) You have been hired by a prospective retailer to recommend pricing and marketing strategies for its Amherst facility. On one graph: Draw a hypothetical Average Total Cost (ATC) curve, the Marginal Cost curve, and a Demand (MU) curve for pot. (Hint: The point where Demand intersects MC should be below the ATC curve.)

b) (1 point) Show the area of net profit (or loss) under perfect competition for the Amherst store as the difference between average total cost and the average revenue (or the price). (Note your profit is the amount sold times the average price price minus ATC.)

Solutions

Expert Solution

a)

In the given diagram, we have shown downward sloping demand curve and marginal revenue curve. Hypothetical average total cost and marginal cost curves are also drawn.

b) Here, total revenue = P*Q

and total cost = ATC * Q

Then, net profit = Total revenue - Total cost

or, net profit per unit = total revenue/Q - total cost/Q = AR-ATC

Now, a firm earns profit when price > ATC. The economic profit is the shaded area in the above figure.


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