Shane Crown Written Assignment 3 ECO 112 – OL010 2018SEP
1. At its current level of production, a profit-maximizing firm in a competitive market receives
$12.50 for each unit it produces and faces an average total cost of $10. At the market price of
$12.50 per unit, the firm’s marginal cost curve crosses the marginal revenue curve at an
output level of 1000 units. What is the firm’s current profit? What is likely to occur in this
market, and why?
Current Profit = ($12.50-$10.00) * 1000= $2,500. The firm’s marginal revenue is greater than its
marginal cost, so it should remain in the same market.
2. Under what conditions should a firm shut down production in the short run? Under what
conditions should a firm shut down in the long run? Explain the difference between the short-
and long-run conditions.
In the short run, when a firm’s revenue received from the sale of a good or service does not
cover at a minimum their variable costs of production, it should shut down. In the long run, if
the price is less than their average total cost, the firm should shut down. The difference
between the two is they would be better off permanently shutting down because the short run
shut down refers to a decision not to produce anything during a specific period of time as a
result of current market conditions and the firm still incurs fixed costs while in the long run
decisions the firm makes has no incurred fixed costs.
3. Define and explain the relationship between total revenue, average revenue, and marginal
revenue for a monopolist. What is monopoly profit? Should a monopolist produce quantities
of product greater than that which would maximize profits?
A monopolist’s total revenue is the quantity of products sold times the price the product is sold
at. Average revenue of a monopolist, is the amount of total revenue received minus the price
the good is being sold at. A monopolist’s marginal revenue is the amount of revenue a firm
receives for each additional sale of a product measured by taking the change in total revenue
when the output increases by a single unit. This means the marginal revenue will always be less
than the price of a good or service.
Monopoly profit is an economic profit that is greater than normal profit. It is gained from a lack
of viable competition in a market, which allows a monopolist to set its prices above the
equilibrium price for a good or service without losing profits to any competitor. A monopolist
must produce quantities of product at the level of output that will maximize its profit only. This
is normally where marginal cost is equal to marginal revenue. Producing more would only cause
the demand curve to shift further down.
4. In what ways can a government create a monopoly? Why might a government do this?
A government can create a monopoly by granting patents and copywriter protection to those
who have invented, produced or written a new product or book. This gives the inventor
exclusive rights and guarantees protection against anyone illegally manufacturing, printing, or
selling the product without the inventor’s permission. This is normally done because they
believe by doing so it will benefit the entire society, however on occasions, primarily for political
gain. A government will also create a monopoly to encourage growth of a certain market.
Shane Crown Written Assignment 3 ECO 112 – OL010 2018SEP
5. Explain the output effect and the price effect for an oligopoly. How does each influence the
oligopolist’s production decision?
The output effect on an oligopoly firm when an adjustment to their production is done by
weighing in the price of the product being greater than the marginal cost, thus causing an
increase in profit. The price effect on this output increase is seen be a rise in the total quantity
sold causing the price of the product to fall and in turn creates a lower profit. Both output and
price effects the oligopoly’s decision by either raising the profit or lowering the profit depending
on the decision made. The revenue from selling the last unit at the market price must exceed
the loss in revenue from selling all previous units at the new lower price. Otherwise, profits will
fall as output is increased.
6. What is a natural monopoly? How does a natural monopoly lead to lower costs than would
exist if there were more than one firm in an industry that is a natural monopoly?
A natural monopoly happens when one single firm discovers that the economic scale, maximum
efficiency and distribution of a particular industry are profitable. If more firms were to compete
in a natural monopoly, it would mean all firms except one can attain the largest volume of
output, and the attraction of the lowest production costs will vanish and the ability to compete
on price will also go away.
7. Entry of firms in a monopolistically competitive industry is characterized by two external
effects. What are these effects and how do they affect a monopolistically competitive firm?
