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 $1 per bag no matter how many bags are produced.

a. If this firm kept on increasing its output level, would ATC per bag ever increase?

Is this a decreasing-cost industry?

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

At that price, what would be the size of the firm’s profit or loss? At that price, the firm's ____ equals ___ million.

c. You find out that if you set the price at $2 per bag, consumers will demand 30 million bags. How big will the firm’s profit or loss be at that price?

d. If consumers instead demanded 40 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 ___ 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 1

Answer:

Given Data

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 $1 per bag no matter how many bags are produced.

a). If this 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.

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

At that price, what would be the size of the firm’s profit or loss? At that price, the firm's ____ equals ___ million.

Charge $1 per bag. At that price, the firm would lose its $30 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, consumers will demand 30 million bags. How big will the firm’s profit or loss be at that price?

The firm will break even (no profit or loss).

Total revenue = $2 x 30 million bags = $60 million

total cost = $30 million + ($1 x 30 million bags) = $60 million

total profit = 0

d). If consumers instead demanded 40 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 ___ million.

The firm will make an economic profit of $10 million.

Total revenue = $2 x 40 million bags = $80 million

total cost = $30 million + ($1 x 40 million bags) = $70 million

total profit = $10 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?

You should charge $1.75 per bag if you want this firm to earn a fair rate of return.

at price $1.75 per bag

total revenue = $1.75 x 40 million bags = $70 million

total cost = $30 million + ($1 x 40 million bags) = $70 million

total profit = 0