Economics
Saudi Electronic University Competitive Caps Industry and Market Price Worksheet

Saudi electronic university

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Question 1 (10 Marks) The following graph represents the situation of Sindbad’s caps, a firm selling caps in the perfectly competitive caps industry. 1) How much output should Sindbad produce to maximize his profit, if the market price is equal to $11? (2 marks) 2) How much profit (loss) will he earn? (2 marks) 3) Indicate the profit (loss) area on the graph. (2 marks) 4) Find the fixed cost paid by the firm. (2 marks) 5) Suppose Sindbad decides to shut down. What would his loss be? (2 marks) Question 2 (20 Marks) The figure below shows the demand and cost curves for a monopolist. Assume there are no fixed costs in the market and an unlimited number of units of the product can be produced at a marginal cost of $5 per unit. As a result average total cost and marginal cost are the same. Price $7 $5 a b e c d f ATC = MC = 5 Demand 18 30 Quantity MR 1) Find the output level and the price charged to consumers, when the monopolist is maximizing its profit. (6 marks) 2) Find the monopoly’s total economic profit when it is maximizing its profit. (4 marks) 3) Indicate the area of consumer surplus under monopoly. (2 marks) 4) What would be the market price and the market quantity, if the industry in the figure was perfectly competitive (Assuming a constant cost industry)? (4 marks) 5) Indicate the area of consumer surplus when the market is served by perfectly competitive firms. (2 marks) 6) What is the area of the deadweight loss from monopoly? (2 marks) ...
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Final Answer

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Question 1 (10 Marks)
The following graph represents the situation of Sindbad’s caps, a firm selling caps in the perfectly
competitive caps industry.

1) How much output should Sindbad produce to maximize his profit, if the market price is equal
to $11? (2 marks)
2) How much profit (loss) will he earn? (2 marks)
3) Indicate the profit (loss) area on the graph. (2 marks)
4) Find the fixed cost paid by the firm. (2 marks)
5) Suppose Sindbad decides to shut down. What would his loss be? (2 marks)

Answer:
Question (1)
1. Because the firm is in a perfectly competitive market, the profit maximizing output is
determined by the output at which the marginal cost is equal to the marginal revenue (MC =
MR) which is the MR = THE PRICE. So, at price 11, Sindbad’s profit maximizing output is
= 100.
2. First, at Q = 100 the ATC = 9 and P = 11


P = 11 > ATC = 9, and this is implyi...

christian31ng (1339)
New York University

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