Assignment: Principles of Microeconomics
The table below presents information on the market for olive oil.
• The demand for olive oil is given in columns (1) and (2) of the table.
• Assume the Long-Run Average Total Cost of producing a gallon of olive oil is constant at $20 per gallon.
• Assume the Long Run Marginal Cost of producing a gallon of olive oil is constant at $20 per gallon.
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1
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2
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3
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4
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5
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6
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7
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Price per Gallon
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Quantity Demanded per year (millions of gallons)
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Total Revenue
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Total Cost
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Marginal Revenue
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Marginal Cost
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Economic Profit
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$20
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10.00M
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$200M
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$200M
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NA
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NA
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$0
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$30
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9.00M
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$40
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8.00M
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$50
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7.00M
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$60
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6.16M
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$70
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4.50M
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$80
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3.50M
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(A) Complete columns (3) - (7) in the table above for Total Revenue, Marginal Revenue, Total Cost, Marginal Cost, and Economic Profit.
(B) Producers of olive oil experience (complete the correct answer)
1. Decreasing returns to scale/diseconomies of scale because_______________.
2. Increasing returns to scale/economies of scale because _________________.
3. Constant returns to scale because _____________________________.
Now, suppose the market for olive oil is a "perfectly competitive" one with a large number of buyers and sellers of olive oil.
(C) Draw a graph in the space below - as neatly as possible - showing the demand curve, marginal revenue curve, long-run average total cost, and long -run marginal cost curves when the market is a perfectly competitive one.
(D) What is the equilibrium quantity (millions of gallons) and price per gallon of olive oil if the market for olive oil is‘perfectly competitive?'
(E) What is economic profit if the olive oil market is perfectly competitive?
(F) What is Consumer Surplus if the olive oil market is perfectly competitive?
Now, suppose the market for olive oil becomes a monopoly. That is, there is only one seller of olive oil.
(G) Draw a graph in the space below - as neatly as possible - showing the demand curve, marginal revenue curve, long-run average total cost, and long -run marginal cost curves when the market for olive oil is a monopoly.
(H). What is the quantity of olive oil bought and sold and the price per gallon of olive oil if the market for olive oil is a monopoly?
(I) What is Economic Profit when the olive oil market is a monopoly?
(J) What is Consumer Surplus when the olive oil market is a monopoly?
(K) What is the 'deadweight loss' when the olive oil market becomes a monopoly?
(L) Compare your answers for the price, quantity, profit, consumer surplus ,and deadweight loss when the olive oil market is a perfectly competitive one versus a monopoly.
Perfect Competition Monopoly
Price __________ ____________
Quantity __________ ____________
Economic Profit ___________ ____________
Consumer Surplus ___________ ____________
Deadweight Loss ______________ ____________