Name: Renee Wong

Student ID: 101223251

Tutorial Group: Group 5 (Thurs @ 9 a.m.)

Multiple choice questions

1) A
2) B
3) D
4) C
5) A
6) D
7) B
8) C

Short answer questions

Question 1
a) The profit maximizing price is P3.
b) The profit maximizing quantity is Q1.
c) The area representing deadweight loss is C+D.
d) The area representing the transfer of consumer surplus to the monopoly is A.

Question 2
1
a) The amount of consumer surplus is x ($30 - $24) x 62 = 186.
2
b) If the government decided to regulate the monopoly for market efficiency, the market
output would be 83 units and the market price will be $22. The consumer surplus would
1
be x ($30 - $22) x 83 = 332.
2
c) If the industry was organized as a perfectly competitive industry, the consumer surplus is
332.
d) If the industry was organized as a perfectly competitive industry, the market output would
be 83 units and market price would be $22.
e) If the firm maximizes its profits, the deadweight loss to society due to this monopoly is
equal to the area ACE.

Question 3
a) The monopoly will produce 835 units and it will charge the price at $59.
b) If the regulatory agency wants to achieve economic efficiency, it requires the monopoly
to charge the price at $20.
c) To achieve economic efficiency, the regulated monopoly will produce 2204 units.
d) If the regulated monopoly charges the price that will achieve economic efficiency, it will
not be making a profit. This is because the cost of producing, which is $35, is higher than
the price. Hence, the regulated will face a loss as the cost is greater than the price.
e) The monopoly will produce 1740 units and charge the price at $35.
f) With the price ceiling of $35, the monopoly will not make any profit or loss as the cost of
production is same as the price which is $35.

Question 4
a)
Total Marginal Marginal
Quantity Price Total Cost
Revenue Revenue Cost
1 $30 $30 - $32 -
2 28 56 $26 43 $11
3 26 78 22 53 10
4 24 96 18 64 11
5 22 110 14 76 12
6 20 120 10 90 14
7 18 126 6 106 16
8 16 128 2 126 20

b) The profit-maximizing price for Velvet Touches is $22 and the profit maximizing
quantity is 5 units.
c) The firm is making a profit of $34.
Profit = Total revenue – Total cost
= $110 - $76
= $34
d) The firm is operating in the short run. This is because at a quantity of 2, the firm is
making a profit as the marginal revenue is greater than the marginal cost. This means that
the extra revenue earned is greater than the extra cost of producing one unit. The firm will
continue to make a profit until it produces a quantity of 5. At a quantity of 6, the firm
starts to make a loss as the marginal cost is greater than the marginal revenue. The
presence of economic profit will attract new firms to enter the market. Hence, the firm
can only enjoy economic profit in the short run and it will make zero economic profit in
the long run.
e) If the firm’s profit is typical of all firms in the market for throw pillows, there will be
more firms entering into the industry in the future. This is because the firm is making
profit initially and this will attract more new firms to enter the industry as the barriers to
entry for monopolistic competitive market is low. If the firm’s loss is typical of all firms
in the market, it vice versa.
f) After all entry adjustments is made, the firm’s profit will decrease. This is because when
more firms are entering the market, the demand will shift to the left. In addition, the
demand curve will be more elastic as there are many available choices appear in the
market. Hence, the firm will not be making a profit. After all exit adjustments, the firm’s
loss will also decrease. As many firms exit the market, this means the demand curve starts
to shift to the right and become more inelastic. Hence, the firm will start to make a profit
instead of loss.