Imagine that it is the year 2199. Technology has progressed at an incredible pac
ID: 1095180 • Letter: I
Question
Imagine that it is the year 2199. Technology has progressed at an incredible pace. The latest discovery is the plutonium engine, which is capable of converting plutonium, a by-product of nuclear fission, into fuel to power the nuclear reactors in our new form of transportation, the rocket-car. However, because the firm that invented the engine, the Futures Unlimited Corporation, already has a government license to control and distribute the quantity of this certain isotope of plutonium on the market, it is now conceivably in charge of a monopoly on plutonium-fueled transportation.
Describe the economic outcome of this single-price monopoly in terms of profit. Provide one (1) supporting fact to support your response.
Describe one (1) way that the Futures Unlimited Corporation makes output and price decisions.
Part B
Would consumers benefit more from a tariff or a quota on imports? Provide one (1) supporting fact to support your response.
Consider the following weekly production possibilities of gloves and hats in Panama and Russia:
Russia Panama
Gloves 20 180
Hats 80 90
What is each country's opportunity cost of producing gloves and hats? If the countries could, should they trade? Provide one (1) supporting fact to support your position.
Explanation / Answer
1)Monopolies, unlike perfectly competitive firms, are able to influence the price of a good and are able to make a positive economic profit. While a perfectly competitive firm faces a single market price, represented by a horizontal demand/marginal revenue curve, a monopoly has the market all to itself and faces the downward-sloping market demand curve. An important consequence is worth noticing: typically a monopoly selects a higher price and lesser quantity of output than a price-taking company; again, less is available at a higher price.
Imagine that the market demand for widgets is Q=30-2P. This says that when the price is one, the market will demand 28 widgets; when the price is two, the market will demand 26 widgets; and so on. The monopoly's total revenue is equal to the price of the widget multiplied by the quantity sold: P(30-2P). This can also be rearranged so that it is written in terms of quantity: total revenue equals Q(30-Q)/2.
The firm can produce widgets at a total cost of 2Q2, that is, it can produce one widget for $2, two widgets for $8, three widgets for $18, and so on. We know that all firms maximize profit by setting marginal costs equal to marginal revenue. Finding this point requires taking the derivative of total revenue and total cost in terms of quantity and setting the two derivatives equal to each other. In this case:
dTRdQ=(30?2Q)2
dTCdQ=4Q
Setting these equal to each other: 15?Q=4Q
So the profit maximizing point occurs when Q=3.
At this point, the price of widgets is $13.50, the monopoly's total revenue is $40.50, the total cost is $18, and profit is $22.50. For comparison, it is easy to see that if the firm produced two widgets price would be $14 and profit would be $20; if it produced four widgets price would be $13 and profit would again be $20. Q=3 must be the profit-maximizing output for the monopoly.
Graphically, one can find a monopoly's price, output, and profit by examining the demand, marginal cost, and marginal revenue curves. Again, the firm will always set output at a level at which marginal cost equals marginal revenue, so the quantity is found where these two curves intersect. Price, however, is determined by the demand for the good when that quantity is produced. Because a monopoly's marginal revenue is always below the demand curve, the price will always be above the marginal cost at equilibrium, providing the firm with an economic profit .
2)
Every time you go shopping, you likely pay higher prices because of tariffs and quotas. It is hard to believe that some of the goods you may be purchasing cost you more than twice as much as they could because of these economic measures! Dairy products, vegetables, tobacco, wool clothes, auto parts, brooms, Chinese tires, leather shoes, peanuts, and chocolate are just some of the common items we pay more for because of tariffs or quotas.
Let's first review what tariffs and quotas are and then discuss the effects they can have on imported goods and the prices we pay. A tariff is a tax imposed on imports, which are goods coming into a country. The tax may range from a few percent of the cost of the good to well over 100% of the cost of the good! This tax is ultimately passed on to consumers, resulting in higher prices.
A quota sets a numerical limit on how much of a product can be imported into a country. This helps to protect producers of domestic products from facing too much competition and ultimately going out of business. Ultimately, quotas benefit and protect the producers of a good in a domestic economy, though the consumers end up paying more if the domestically produced goods are priced higher than imports.
There are many reasons that tariffs and quotas may be used. The most common reasons are often geared towards protecting newer or inefficient domestic industries that are seen as important to the American economy and the production of jobs. The government view is that by protecting these domestic industries, we can maintain jobs through increased sales of domestic goods. This ultimately can lead to higher tax revenue collected.
If we didn't protect some of our firms, other countries could dump thousands of products on our country at extremely low prices and potentially hurt many of our domestic businesses. Now, let's explore in more detail the effects of tariffs and quotas.
Tariff Effects
The additional tax, or tariff, on imported goods can discourage foreign countries or businesses from trying to sell products in a foreign country. The additional taxes make the foreign import either too expensive or not nearly as competitive as it would be if the tariff didn't exist. This can lead to fewer choices of goods and a lower quality for consumers. The amount of chocolate, fruits and vegetables, and automotive parts you have to choose from are all subject to the effects of tariffs.
Domestic producers benefit by ultimately facing reduced competition in their home market, which leads to lower supply levels and higher prices for consumers. As you can see from the graph below, S0 and D0 represent the original supply and demand curves, which intersect at (P0, Q0). St shows what the supply curve is with the introduction of the tariff. The market then settles at (Pt, Qt). Less of the good is produced, and consumers pay higher prices.
When a consumer does purchase a higher-priced imported good with a tariff imposed on it, the consumer now has less money to spend on other things. This forces consumers to either buy less of the imported good or less of some other good, ultimately lowering the purchasing power of consumers. It is important to remember that although consumers may pay higher prices because of tariffs and have limited options, the potential benefit is that domestic sales of goods can increase, ultimately leading to higher domestic sales and more jobs for companies inside the country.
Quota Effects
The numerical limits imposed on imported goods through quotas ultimately leads to higher prices paid by consumers. Essentially, the import quota prevents or limits domestic consumers from buying imported goods. The import quota reduces the supply of imports. This reduces the overall natural supply of goods in the domestic country and causes prices to rise above what many other countries may pay for a good where there are no artificially imposed limits on goods.
Reference:Wikipedia