Chapter 12, Problem 12.2P

a)

To determine

To Draw: the graph for demand, marginal cost, and marginal revenue curves.

Answer to Problem 12.2P

  

Explanation of Solution

Given Figure

  

Given demand is $\text{Q =10,000-1,000-P}$

Marginal cost is constant at $\text{MC =6}$

Marginal revenue curve= $MR=10-\frac{\text{Q}}{500}$

The above figure shows that demand curve, marginal cost curve and marginal revenue.

One of the negatively sloped curve is demand Curve. Also the marginal revenue curve is negatively sloped and twice vertically than the demand curve. The marginal cost is fixed and finally marginal cost is horizontal.

Economics Concept Introduction

Introduction:

When the produced quantity is added by one whenever changes occur in the whole cost is called marginal cost. Suppose many number of goods are produced that time the marginal cost will be increased unit by unit.

One of another revenue that would be generated by product sales when increasing with one unit is called market revenue. It’s defined by divide the changes in total revenue and changes in output quantity.

b)

To determine

To Calculate: the price and quantity associated with Point C, the perfectly competitive outcome and also compute industry profit, consumer surplus, and social welfare.

Answer to Problem 12.2P

Industry Profit is $\text{\$0}$

Consumer Surplus is $\text{\$8,000}$

Social Welfare is $\text{\$8,000}$

Explanation of Solution

Given Figure

  

Given demand is $\text{Q =10,000-1,000-P}$

Marginal cost is constant at $\text{MC =6}$

Marginal revenue curve= $MR=10-\frac{\text{Q}}{500}$

When the Price equals marginal cost, i.e.) $\text{\$6}$ at that moment Competitive equilibrium occurs.

The price level of $\text{\$6}$ is $\text{\$4,000}$

Thus, when the competitive equilibrium C, the quantity level is $\text{4,000}$ and the price level is $\text{\$6}$

The total revenue $\text{=4,000}\times \text{\$}6$

  $\text{ = \$24,000}$

The marginal cost is constant at $\text{\$6}$ .So, the average cost is also $\text{\$6}$ .The quantity level is $\text{4,000}$ .

The total cost $\text{=4,000}\times \text{\$}6$

  $\text{ = \$24,000}$

Thus, the total revenue and total cost are equal, the industry profit is $\text{\$0}$

  

The consumer surplus equals to the area of triangle BCD.

Area of triangle $=\frac{1}{2}\times \text{base}\times \text{height}$

Consumer Surplus $=\left(\frac{1}{2}\right)\times \left(10-6\right)\times \left(4000-0\right)$

  $=\text{\$8,000}$

Social welfare= Consumer surplus +Industry Profit

  $=\text{\$8,000 +\$0}$

  $=\text{\$8,000}$

Economics Concept Introduction

Introduction:

Market equilibrium under the imperfect competition can appear on the demand curve. The given figure shows that marginal costs are constant overall output ranges, the Bertrand game occurs at point C in the equilibrium also compatible to the perfectly competitive outcome.

c)

To determine

To Calculate: the price and quantity associated with point M, the monopoly/perfect cartel outcome and also compute the industry profit, consumer surplus, social welfare and deadweight loss.

Answer to Problem 12.2P

Industry Profit is $\text{\$4000}$

Consumer Surplus is $\text{\$2,000}$

Social Welfare is $\text{\$6,000}$

Deadweight loss is $\text{\$2,000}$

Explanation of Solution

Given Figure

  

Given demand is $\text{Q =10,000-1,000-P}$

Marginal cost is constant at $\text{MC =6}$

Marginal revenue curve= $MR=10-\frac{\text{Q}}{500}$

The monopoly outcome M, the quantity level is $\text{2,000}$ and the price level is $\text{\$8}$

The total revenue $\text{=2,000}\times \text{\$8}$

  $\text{ = \$16,000}$

The marginal cost is constant at $\text{\$6}$ .So, the average cost is also $\text{\$6}$ .The quantity level is $\text{2,000}$ .

The total cost $\text{=2,000}\times \text{\$}6$

  $\text{ = \$12,000}$

Thus, the total revenue and total cost are $\text{\$16,000 and \$12,000}$ respectively,

The industry profit is $=\left(\text{\$16,000 - \$12,000}\right)$

  $=\text{\$4,000}$

  

The consumer surplus equals to the area of triangle BME.

Area of triangle $=\frac{1}{2}\times \text{base}\times \text{height}$

Consumer Surplus $=\left(\frac{1}{2}\right)\times \left(10-8\right)\times \left(2000-0\right)$

  $=\text{\$2,000}$

Social welfare= Consumer surplus +Industry Profit

  $=\text{\$2,000 +\$4,000}$

  $=\text{\$6,000}$

Deadweight Loss=Social welfare at competitive equilibrium - social welfare at the monopoly outcome

  $=\text{\$8,000 - \$6,000 }$

  $=\text{\$2,000 }$

Economics Concept Introduction

Introduction: One kind of firms are having formal agreement for collusion to produce the trademark output and sell in the trademark price is generally known as cartel. Extreme type of perfect collusion is called Perfect cartel. Through this, firms producing a different homogeneous product to make the centralized product.

d)

To determine

To Calculate: the price and quantity associated with point A, a hypothetical imperfectly competitive outcome, it lies at a price halfway between C and M and also compute industry profit, consumer surplus, social welfare and deadweight loss.

Answer to Problem 12.2P

Industry Profit is $\text{\$3000}$

Consumer Surplus is $\text{\$4,500}$

Social Welfare is $\text{\$7,500}$

Deadweight loss is $\text{\$500}$

Explanation of Solution

Given Figure

  

Given demand is $\text{Q =10,000-1,000-P}$

Marginal cost is constant at $\text{MC =6}$

Marginal revenue curve= $MR=10-\frac{\text{Q}}{500}$

When the Price equals marginal cost, i.e.) $\text{\$6}$ at that moment Competitive equilibrium occurs.

The price level of $\text{\$6}$ is $\text{\$4,000}$

The outcome A, the quantity level is $\text{3,000}$ and the price level is $\text{\$7}$

The total revenue $\text{=3,000}\times \text{\$7}$

  $\text{ = \$21,000}$

The marginal cost is constant at $\text{\$6}$ .So, the average cost is also $\text{\$6}$ .The quantity level is $\text{3,000}$ .

The total cost $\text{=3,000}\times \text{\$}6$

  $\text{ = \$18,000}$

Thus, the total revenue and total cost are $\text{\$21,000 and \$18,000}$ respectively,

The industry profit is $=\left(\text{\$21,000 - \$18,000}\right)$

  $=\text{\$3,000}$

  

The consumer surplus equals to the area of triangle BAG.

Area of triangle $=\frac{1}{2}\times \text{base}\times \text{height}$

Consumer Surplus $=\left(\frac{1}{2}\right)\times \left(10-7\right)\times \left(3000-0\right)$

  $=\text{\$4,500}$

Social welfare= Consumer surplus +Industry Profit

  $=\text{\$4,500 +\$3,000}$

  $=\text{\$7,500}$

Deadweight Loss=Social welfare at competitive equilibrium - social welfare at the outcome A

  $=\text{\$8,000 - \$7,500 }$

  $=\text{\$500 }$

Economics Concept Introduction

Introduction: imperfectly competition occurs in a market suppose one of the conditions are left or unmet with perfectly competition. This kind of market is generally very common. Here products and services and prices are not set by supply and demand.