Assume that firms each face a total cost function of TC = 10 + 5Q to produce art
ID: 1236108 • Letter: A
Question
Assume that firms each face a total cost function of TC = 10 + 5Q to produce artificialChristmas trees. Note that this total cost function indicates that there is a constant marginal
cost (MC) of $5 per tree produced (i.e., MC = $5). Suppose that American Tree, one
domestic producer, convinces Congress that because its production methods are the safest in
the industry, it should be allowed to be the only supplier of artificial trees to American
consumers. Congress agrees and awards American Tree the only license in the country to
produce and sell artificial trees. Suppose the market demand and marginal revenue (MR) for
artificial trees is given by:
P = 100 - Q (Inverse demand curve)
MR = 100 - 2Q (Marginal revenue curve)
a. Graph your results found in part a). Be sure to completely label your graph.
b. Calculate the loss of consumer surplus from the monopolization of fireworks production.
c. What is the monopolist
Explanation / Answer
the cost functions for these products are given by 2 C ( q S ,0) = 4 + q S C (0, qT ) = 4 + qT C ( q S , qT ) = 7 + q s2 + qT a. Does the production of shampoo exhibit economies of scale? Explain your reasoning. 4 + q s2 qs AC 2 1 S= = = 2 + > 1? MC 2q s qs 2 2 1 > q s2 2 4 > q s2 Monopolist's profit maximizing output is when his MC curve meets MR curve. In fact, the opportunity to earn monopoly rents results in resources being ... it is a direct transfer and, summing over all individuals, society's wealth remains ... Any cost incurred in the competition to obtain or maintain a monopoly is a ... the social cost of monopoly can be measured by measuring area A + DWL Economic theory suggests that monopoly results in a social loss because output is restricted below its optimal level, meaning that marginal benefit and marginal cost are not equated. Traditionally this social loss has measured in terms of the deadweight loss (DWL) of monopoly. However, this measure of social loss assumes that the monopoly is costlessly created and maintained. In fact, the opportunity to earn monopoly rents results in resources being invested in unproductive activities in their pursuit. In other words, rent seeking occurs. This essay examines the theory of rent seeking as applied to monopoly. The types, cost implications and solutions to rent seeking are discussed in turn. In conclusion, it will be evident that the costs of rent seeking are largely determined by the precise nature of the rent seeking game. The Social Cost of Monopoly The theory of monopoly states that a monopolist earns supernormal profits by restricting output and hence increasing prices above its perfectly competitive level.