2) Imagine that you have started a firm and own the patent for a new technology that allows for the 3D printing of food. This is a huge nutritional breakthrough since the printer can provide nutritional food for years. Since you are the first with this technology and have patented it, your firm is the only firm that can produce and sell this type of printer. There are no close substitutes for your printer and your data indicates weekly demand is given by the equation Qd = 9000 - 2P. a) Your production analysis indicates that your firm's cost function is C(Q) = F +Q². Illustrate the market, showing the inverse demand curve, the MR curve and the MC curve. Then, compute and illustrate your firm's profit maximizing price and quantity of the printer. How low must the fixed cost be to ensure that the firm is making positive profits? Make sure to clearly label all relevant curves. Finally, what is the markup on the printer (measure markup in the following way: Price/MC)? b) Redraw the graph, but this time shade in the areas that represent consumer surplus, producer surplus, and deadweight loss. Calculate the numerical values of each. Is this the maximum amount of welfare that this market could possibly generate? If not, how far does it fall short. c) If congress regulated the price of 3D food printers with the goal of maximizing society's total surplus/welfare, what price should it choose? Show that price in your diagram, the corresponding quantity that your firm would provide, and explain why this price is efficient using the concepts of marginal cost and marginal benefit. d) Suppose instead that the government pays some of your firm's fixed costs, such that F = $4,500,000, but requires in return that you must charge the price which earns your firm the perfectly competitive long-run equilibrium level of economic profits. What price would the government require you to charge? How would the markup with this price compare to the markup under the monopolist's price? Would the quantity that corresponds to this price be higher, lower, or the same as the efficient quantity found in part (c)?
2) Imagine that you have started a firm and own the patent for a new technology that allows for the 3D printing of food. This is a huge nutritional breakthrough since the printer can provide nutritional food for years. Since you are the first with this technology and have patented it, your firm is the only firm that can produce and sell this type of printer. There are no close substitutes for your printer and your data indicates weekly demand is given by the equation Qd = 9000 - 2P. a) Your production analysis indicates that your firm's cost function is C(Q) = F +Q². Illustrate the market, showing the inverse demand curve, the MR curve and the MC curve. Then, compute and illustrate your firm's profit maximizing price and quantity of the printer. How low must the fixed cost be to ensure that the firm is making positive profits? Make sure to clearly label all relevant curves. Finally, what is the markup on the printer (measure markup in the following way: Price/MC)? b) Redraw the graph, but this time shade in the areas that represent consumer surplus, producer surplus, and deadweight loss. Calculate the numerical values of each. Is this the maximum amount of welfare that this market could possibly generate? If not, how far does it fall short. c) If congress regulated the price of 3D food printers with the goal of maximizing society's total surplus/welfare, what price should it choose? Show that price in your diagram, the corresponding quantity that your firm would provide, and explain why this price is efficient using the concepts of marginal cost and marginal benefit. d) Suppose instead that the government pays some of your firm's fixed costs, such that F = $4,500,000, but requires in return that you must charge the price which earns your firm the perfectly competitive long-run equilibrium level of economic profits. What price would the government require you to charge? How would the markup with this price compare to the markup under the monopolist's price? Would the quantity that corresponds to this price be higher, lower, or the same as the efficient quantity found in part (c)?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:2) Imagine that you have started a firm and own the patent for a new technology that allows for the 3D printing of
food. This is a huge nutritional breakthrough since the printer can provide nutritional food for years. Since you are
the first with this technology and have patented it, your firm is the only firm that can produce and sell this type of
printer. There are no close substitutes for your printer and your data indicates weekly demand is given by the
equation Qa = 9000 - 2P.
a) Your production analysis indicates that your firm's cost function is C(Q) = F +Q². Illustrate the market,
2
showing the inverse demand curve, the MR curve and the MC curve. Then, compute and illustrate your firm's
profit maximizing price and quantity of the printer. How low must the fixed cost be to ensure that the firm is
making positive profits? Make sure to clearly label all relevant curves. Finally, what is the markup on the printer
(measure markup in the following way: Price/MC)?
b) Redraw the graph, but this time shade in the areas that represent consumer surplus, producer surplus, and
deadweight loss. Calculate the numerical values of each. Is this the maximum amount of welfare that this
market could possibly generate? If not, how far does it fall short.
c) If congress regulated the price of 3D food printers with the goal of maximizing society's total surplus/welfare,
what price should it choose? Show that price in your diagram, the corresponding quantity that your firm would
provide, and explain why this price is efficient using the concepts of marginal cost and marginal benefit.
d) Suppose instead that the government pays some of your firm's fixed costs, such that F = $4,500,000, but
requires in return that you must charge the price which earns your firm the perfectly competitive long-run
equilibrium level of economic profits. What price would the government require you to charge? How would the
markup with this price compare to the markup under the monopolist's price? Would the quantity that
corresponds to this price be higher, lower, or the same as the efficient quantity found in part (c)?
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