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Assume that firms each face a total cost function of TC = 10 + 5Q to produce artificial Christmas trees. Note that this total cost function indicates that there is a constant marginal cost (MC) of $5 per tree produced (i.e., MC = $5). Suppose that American Tree, one domestic producer, convinces Congress that because its production methods are the safest in the industry, it should be allowed to be the only supplier of artificial trees to American consumers. Congress agrees and awards American Tree the only license in the country to produce and sell artificial trees. Suppose the market demand and marginal revenue (MR) for artificial trees is given by:

P = 100 - Q (Inverse demand curve)
MR = 100 - 2Q (Marginal revenue curve)

a. Graph your results found in part a). Be sure to completely label your graph.
b. Calculate the loss of consumer surplus from the monopolization of fireworks production.
c. What is the monopolist's profit (graphically and numerically)?
d. What is the DWL to society of having this market monopolized versus competitive?

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M9493590

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