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Lecture

ECN 104 Lecture Notes - Marginal Revenue, Marginal Cost, Demand Curve


Department
Economics
Course Code
ECN 104
Professor
Tom Barbiero

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Answers to Assignment Eight 4-6
4. Draw a graph that illustrates the dilemma of regulation for a natural monopoly. On the graph,
show the: (a) “socially optimal” price; (b) “fair-return” price; and (c) profit-maximizing price for
the unregulated monopolist.
The socially optimal price is shown where price is determined by the intersection of the demand
curve and MC. This low price will produce the most output but results in economic loss. The
unregulated monopolist will produce at the level of output determined by the intersection of MR
and MC. The price will be higher in this case and output will be less. The “fair-return” price is
set at the output level where ATC intersects the demand curve. This output level is less than the
one for the socially optimal price, and the price is higher, but the output level is greater and price
is lower than in the unregulated case. Also, the firm makes no economic profit (just a normal
profit) but also incurs no economic losses that would require a government subsidy. The “fair-
return” price is a compromise between two difficult choices, and it improves the allocation of
resources over the unregulated case.
5. Assume that the short run cost and demand data given in the table below confront a monopolistic
competitor selling a given product and engaged in a given amount of product promotion.
Compute the marginal cost and marginal revenue of each unit of output and enter these figures in
the table.
Total Marginal Quantity Marginal
Output cost cost demanded Price revenue
0 $ 25 0 $60
1 40 $_____ 1 55 $_____
2 45 _____ 2 50 _____
3 55 _____ 3 45 _____
4 70 _____ 4 40 _____
5 90 _____ 5 35 _____
6 115 _____ 6 30 _____
7 145 _____ 7 25 _____
8 180 _____ 8 20 _____
9 220 _____ 9 15 _____
10 265 _____ 10 10 _____
(a) At what output level and at what price will the firm produce in the short run? What will be
the total profit?
(b) What will happen to demand, price, and profit in the long run?
Total Marginal Quantity Marginal
Output cost cost demanded Price revenue
0 $ 25 0 $60
1 40 $15 1 55 $ 55
2 45 5 2 50 45
3 55 10 3 45 35
4 70 15 4 40 25
5 90 20 5 35 15
6 115 25 6 30 5
7 145 30 7 25 –5
8 180 35 8 20 –15
9 220 40 9 15 –25
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