chapter14 - 1.a. ' b.,thecostisnodiffere

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Problems and Applications 1. a. Long-distance phone service was originally a natural monopoly because the installation of  phone lines across the country meant that one firm's costs were much lower than if two or more  firms did the same thing. b. With communications satellites, the cost is no different if one firm supplies long-distance calls  or if many firms do so. So the industry evolved from a natural monopoly to a competitive market.  It is efficient to have competition in long-distance phone service and regulated monopolies in local  phone   service   because   local   phone   service   remains   a   natural   monopoly   (being   based   on  landlines) while long-distance service is a competitive market (being based on satellites). 2. a. Figure 5 illustrates the market for groceries when there are many competing supermarkets  with constant marginal cost. Output is   Q C , price is   P C , consumer surplus is area A, producer  surplus is zero, and total surplus is area A. b. If the supermarkets merge, Figure 6 illustrates the new situation. Quantity declines from  Q to  Q and price rises to  P M . Consumer surplus falls by areas D + E + F to areas B + C. Producer  surplus becomes areas D + E, and total surplus is areas B + C + D + E. Consumers transfer the  amount of areas D + E to producers and the deadweight loss is area F.
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3. Larry wants to sell as many drinks as possible without losing money, so he wants to set  quantity where price (demand) equals average total cost, which occurs at quantity  Q and price  P in Figure 8. Curly wants to bring in as much revenue as possible, which occurs where marginal  revenue equals zero, at quantity  Q and price  P C . Moe wants to maximize profits, which occurs  where marginal cost equals marginal revenue, at quantity  Q and price  P M . 4. If the price of tap water rises, the demand for bottled water increases. This is shown in Figure 4  as a shift to the right in the demand curve from  D 1   to  D 2 . The corresponding marginal-revenue  curves are  MR 1   and  MR 2 . The profit-maximizing level of output is where marginal cost equals  marginal revenue. Prior to the increase in the price of tap water, the profit-maximizing level of  output is  Q 1 ; after the price increase, it rises to  Q 2 . The profitmaximizing price is shown on the  demand curve: it is  P 1   before the price of tap water rises, but rises to  P 2 . Average total cost is  AC before the price of tap water rises and  AC after. Profit increases from (  P   AC 1 ) x  Q to (  P   AC 2 ) x  Q 2 .
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5.   a.   The   table   below   shows   total   revenue   and   marginal   revenue   for   the   bridge.   The 
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