For each of the following separate graphing problems, draw appropriate graph(s). Label all the curves. You may need to indicate values on the axes.

Suppose firm H first experiences economies of scale, then constant return to scale and then diseconomies of scale when firm H produces more and more. Draw a graph for firm H. Make sure that you label the curve.

Assume that the demand for insulin is perfectly inelastic, and the demand for luxury handbags is perfectly elastic. Draw two graphs to compare the effects of sales tax imposed on (1) insulin vs (2) luxury handbags. The sales tax is levied on sellers. Indicate CS, PS, tax revenue and DWL.

Firm C in a perfectly competitive market faces the following conditions. Firm C is currently maximizing profit.

Average total cost = $75
Average variable cost = $45
Marginal cost = $52
Marginal revenue = $52
Quantity = 20

Based on the information above, draw the graph for firm C. Your graph should include the curves of ATC, AVC, MC, and MR. You must also mark the values of ATC, MC, MR, and Q in your graph. Indicate the profit or loss.

Solutions

Expert Solution

(a) Long run ATC curve:

Arrow A repesents economies of scale where average cost is decreasing as output increases; arrow B represents constant returns to scale where cost of production is constant; and arrow C represents diseconomies of scale where cost of production increases as output increases.

(b) Perfectly inelastic demand:

Panel (1) shows inelastic demand for insulin. CS is infinite because consumes are willing to pay any price for the product. PS reduces There is no deadweight loss. Tax revenue will be tax amount -times the quantity.

Panel (2) repesents perfectly elstic demand for luxury handbags. Producer surplus reduces to a very small area as the whole tax mount is borne by sellers. There is deadweight loss as quantity reduces due to tax burden.There is no consuer surplus because the consumers will match the price with decreased demand.

Firm is is undergoing loss as price is lower than ATC.

Rahul Sunny answered 2 years ago

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