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Question 1 of 14

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You must read each slide, and complete any questions on the slide, in sequence.

Consider the following graph for a firm that can choose either to behave as a competitive firm or act as a monopolist. The marginal cost (MC) curve, the marginal revenue (MR) curve, and the demand (D) curve corresponding to each level of output (Q) and price (P) are shown in the graph below.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

Under monopoly, the firm would follow the pricing rule , which is found at point .

3
A monopolist maximizes revenue where MR = MC. Here, this is point U. The price is determined from the demand curve, which lies above the MR curve.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

The firm would produce units at a price of .

3
The quantity where MR = MC is 180 units on this graph. The corresponding price on the demand curve is $8.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

Profit would be depicted by the bounded by .

3
Profit is the area that remains when total costs are subtracted from total revenue. T − J is the profit per unit, and J is the number of units.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

Deadweight loss would be depicted by the bounded by .

3
Deadweight loss is a triangle that represents the reduced quantity and higher costs that result from a monopoly.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

How much is the firm’s revenue? $

3
Revenue = Price × Quantity. Here, P = $8 and Q = 180 units, hence revenue = $8 × 180.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

How much are the firm’s costs? $

3
ATC at Q = 180 = $5. If costs per unit are $5, and Q = 180, the firm's costs are $5 × 180.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

How much are the firm’s profits? $

3
Profit = Revenue – Costs.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

Under perfect competition, the firm would follow the pricing rule , which is found at point .

3
Perfectly competitive firms maximize revenue where P = MC.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

The firm would produce units at a price of .

3
The firm would produce at the point where P = MC.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

In the long run, profit would be .

3
Perfectly competitive firms earn zero profit in the long run.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

Deadweight loss would be .

3
Perfectly competitive firms are efficient, so there is no deadweight loss.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

How much is the firm’s revenue? $

3
Revenue = Price × Quantity. Here, P = $6 and Q = 240 units. Hence, revenue = $6 × 240.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

How much are the firm’s short-run costs? $

3
If cost per unit are $5, and Q = 240 units, the firm’s costs equal $5 x 240.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 720 in increments of 40. The vertical axis shows the ‘Price’, ranging from 0 to 12 in single increments. The marginal cost curve, MC, is an upward sloping line originating at 80 on the horizontal axis and approximately at 1 on the vertical axis. It ends at approximately 400 on the horizontal axis and 11 on the vertical axis. The demand curve is a downward sloping line originating at 80 on the horizontal axis and 11 on the vertical axis. It ends at approximately 380 on the horizontal axis and 2 on the vertical axis. The marginal revenue curve, MR, is a downward sloping line originating at approximately 140 on the horizontal axis and 9 on the vertical axis. It meets the horizontal axis at 240 and the point is labeled W. The ATC curve starts at 40 on the horizontal axis, and between 6 and 7 on the vertical axis. It ends at 400 on the horizontal axis, and between 6 and 7 on the vertical axis. Four points are indicated on the vertical axis at 4, 5, 6, and 8. These points are labeled X, L, S, and R. Three other points are indicated on a vertical dotted line extending from 180 on the horizontal axis. The point of intersection of MC and MR is labeled U and corresponds to 4 on the vertical axis. Point J on the ATC curve corresponds 5 on the vertical axis. Point T on the demand curve corresponds to 8 on the vertical axis. Another point on the ATC curve is labeled M and corresponds to 240 on the horizontal axis, and 5 on the vertical axis. The point of intersection of the demand and MC curves is labeled V.

How much are the firm’s short-run profits? $

3
Profit = Revenue – Costs. Here, profit = $1,440 - $1,200. This is consistent with the behavior of competitive firms; profit is smaller than under a monopoly.