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 $6 per bag no matter how many bags are produced.

Instructions: Enter your answers as whole numbers. In part e, round your answer to 2 decimal places.

a. If this firm kept on increasing its output level, would ATC per bag ever increase? (Click to select)YesNo.

     Is this a decreasing-cost industry? (Click to select)YesNo.

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

     At that price, what would be the size of the firm’s profit or loss?

     At that price, the firm's (Click to select)profitloss equals $ million.

     Would the firm want to exit the industry? (Click to select)YesNo.

c. You find out that if you set the price at $7 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 $7 per bag, how big would the firm’s profit or loss be?

     At that price, the firm's (Click to select)profitloss 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.$ per bag.

Answer 1

A. The total cost is given as,

TC = 30 + 6Q

ATC= 30/Q + 6

So if the output increases as seen above the fixed costs will get distributed with every additional unit. So the ATC will never increase and answer is False.

Yes, going by the above explanation, it is a decreasing cost industry.

B Price = MC.

MC = $ 6 , so Price = $6.

Profit = TR - TC

TR = P*Q = 6Q

TC = 30 + 6Q

Profit = 6Q-30-6Q = - $30 million i.e. (LOSS of $30 million)

The firm will exit on account of this loss.

C New Price = $7 and Demand = 30 million bags

TR = 7*30 = $ 210 million

TC = 30 + 6*30 = $210 million.

Profit = TR-TC = 0 , no profit no loss

D At Q = 40 million bags, new TC = 30 + 6*40 = $270 million

TR = $210 million

Profit = 210 - 270 = - $ 60 million ( i.e. loss of $ 60 million)

Hope this helps. It will be great if you can share your feedback. Thank you!!