Question 1:
Assume the market for home pest control services (spraying to kill unwanted bugs and creepy crawlies around the exterior of your home) is perfectly competitive and is currently in equilibrium.
a. Draw a carefully labeled graph, showing the supply and demand in the market. Show the following on your graph:
i. the equilibrium price and quantity, labeled as Pe and Qe.
ii. the area showing the consumer surplus, labeled as CS. a
iii.the area showing the producer surplus, labeled as PS.
b. Assume that an effective price ceiling is imposed by the government at Pc which is less than Pe. Show the ceiling price on your graph and discuss the following:
i. what will the result be of the ceiling?
ii. what will happen to the consumer and producer surpluses you identified above.
c. Now assume that the price ceiling is abolished but that the industry is taken over by "Gotnobugs," a large firm that forms a monopoly in the home pest control market. Draw a new graph showing the new price and quantity equilibrium and compare the results under monopoly with those in part a, above.
Question 2:
A patent gives the inventor exclusive rights to manufacture and sell a product for a certain length of time (usually 17 years). Assume ABCGolf has invented a golf swing analyzer that makes it simple for a golfer to produce a solid golf swing and hit the golf ball long and straight. Further assume that ABCGolf's patent gives it a monopoly on this golf swing improvement device.
a. ABCGolf is making an economic profit. Draw a correctly labeled graph that includes MR, Demand, MC, and ATC for this monopoly. Be sure your graph correctly shows the profit maximizing price and quantity and shades in the economic profit.
b. The product of ABCGolf uses several exotic raw materials. The government places a tax on those raw materials, and the MC and ATC both increase. How will the profit maximizing price and quantity change as a result? How do you know?
c. Assume that the government cancels ABCGolf's patent. Other firms are now allowed to produce and sell this very popular device. What will happen to ABCGolf's profits in the long-run? What will happen to price and quantity in this newly competitive market?