101hwk5key - ECO 101 830 Principles of Microeconomics 1....

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ECO 101 830 Principles of Microeconomics Homework #5 key 1. Consider the graph below of a monopoly firm. P, MR Q D MR Q1 P2 MC = ATC P1 Q2 A B C a) What is the profit maximizing output and price of the monopoly? profit maximizing quantity is where MR=MC at Q1 profit maximizing price is where Q1 hits the demand curve at P2 b) Is the firm earning an economic profit? What area(s) (A, B and/or C) denote the economic profit? Yes, the firm is earning an economic profit of (P2-ATC)Q1 represented by the area of A c) What area(s) (A, B and/or C) denote the deadweight loss? The deadweight loss is represented by the area of the triangle C 2. Describe an economic argument for laws that prohibit and/or strictly limit monopolies. Monopolies are inefficient, leading to market failure. The monopolist restricts output in order to charge a higher price and maximize profits. This lost of output generates a deadweight loss, which is a loss of consumer surplus not redistributed to producers.
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3. Contrast perfect competition and monopoly.
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101hwk5key - ECO 101 830 Principles of Microeconomics 1....

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