Question

Although the following questions ask you to draw diagrams, you do not have to submit these. You do, however, need to know how to draw them.

Suppose Apple has a monopoly on a new product, the iFraud. The market is characterized by:

            Short Run Marginal Cost of Supply:             MC = 100 + 2Q

            Short Run Average Total Cost:                      AC = 100 + Q + 150,000/Q

            Marginal Willingness to Pay:                         P = 1600 – 4Q

A. Illustrate the MC, Demand, and Marginal Revenue on a diagram. What do the equilibrium price and quantity equal?

Quantity =

Price = $

B. Make a copy of your illustration from part A. On this diagram, identify the consumer surplus, producer surplus, and deadweight loss. The DWL should be a triangle with a maximum point at a price of $  , a minimum point at a price of $  , and a final point to the right at a quantity of  .

C. Compute the values of consumer surplus, producer surplus, and deadweight loss. Recall that the area of a triangle is (1/2)*Base*Height.

CS = $

PS = $

DWL = $

D. What does the profit equal?

$

E. Will Apple will shut down production of the iFraud in the short run?

(Click to select)  Yes, because its price is less than its AVC.  No, because its price is greater than its AVC.  Yes, because its producer surplus is negative.  Yes, because its profit is negative.  No, because its producer surplus is positive.

F. Is the profit the same as producer surplus?

(Click to select)  No  Yes

G. What would the efficient level of production be?

H. If Apple produced iFrauds at the efficient price and quantity, what is the social welfare generated?

$

Answer 1

A.

Green Line: Marginal willingness to pay a.k.a demand curve or Average revenue curve

Red Line: Marginal cost curve

Blue line: Average cost curve

B.

The DWL should be a triangle with a maximum point at a price of $1000 a minimumpoint at price of $400 and a final point to the right at the quantity of 250.

C.

D.

E. No, because its producer surplus is positive.

Monopoly will only shut down in the short run if they cannot even earn sufficient revenue to cover its variable cost . Here as producer surplus is positive, Apple will not shut down its operation.

F. No, Producer surplus is related to profit but not same. Producer surplus only takes into account variable cost, subtracts variable cost from revenue while profits subtract both variable and fixed cost from revenue. Hence the producer surplus will be always greater than profits.

G.

H.