Answer to Question #181616 in Microeconomics for Rupak

Question

1)There are three possible short-run profit outcomes (Break-even point, economic profit and

economic loss) in a perfectly competitive market.

a) Draw all three possible short-run profit outcomes and explain in your own words. (5)

3. a) Why does a single-price monopoly produce a smaller output and charge more than the

price that would prevail if the market were perfectly competitive? (3)

b) How does a monopoly transfer consumer surplus to itself? (2)

2.a)Define economies of scale and diseconomies of scale with diagram. (2)

Answer 1

QUESTION 1

ATC- average total cost

MC – marginal cost

MR- marginal revenue

P- Price

Q - Quantity

Break-even point

When the ATC curve meets MC curve, the manufacturer will break even during perfect competition in the market. The producer will lose money when the company is operated below this point but can operate above shutdown point and reduce losses by terminating the production process.

Economic profit

The company will make a profit when its goods market price remains above ATC since Profit = Total revenue- Total costs

Economic loss

When the market price is below ATC, the firm will experience losses. From the formula; Profit = Total revenue- Total costs, the total revenues will be less than the total costs resulting in a negative figure.

QUESTION 2

Economies of scale

It refers to the cost advantage a company gets when it raises its production levels for example when a firm increases its output due to improved technology the cost of the goods /services reduces .the reduced cost of goods is an advantage a company will get over others when it comes to price. 

 Diseconomies of scale 

Occurs when a firm has become so big until the cost of production per unit will start rising. This will lead to the loss of its large-scale benefits. This happens when cost management and coordination problems as the firm enlarges

The average cost of production decreases with increasing output hence the company enjoys economies of scale until it reaches an optimum level of quantity produced. Further increase in production beyond optimum quantity, the company starts to lose its benefits of scale and this is referred to as diseconomies of scale. Therefore the curve starts to rise since the average cost per unit rises with increased output

QUESTION 3

A)To figure out the production level and price that would maximize the benefit of monopoly.

B)It increases the price by reducing the quantity available to the consumers for the purchase