Elasticity (Chapter 5)
A city has built a bridge over a river and it decides to charge a toll to everyone who crosses. For one year, the city charges a variety of different tolls and records information on how many drivers cross the bridge. The city thus gathers information about demand for the bridge (numbers of cars travelling at different prices). If the city wishes to raise as much revenue as possible from the tolls, where will the city decide to charge a toll: in the inelastic portion of the demand curve, the elastic portion of the demand curve, or the unit elastic portion? Explain.
The Output Decision and Industry Structure (Chapters 7, 8, and 9)
Explain in words and with reference to a graph, why profits are maximized when firms choose to produce at the level of output at which marginal revenue equals marginal cost. (Hint: If MR=MC at 10 units of output, why would the firm not want to produce 9 units or 11 units?)
Explain why a firm will continue to operate in the short-run even if it is making an economic loss as long as it is covering its variable costs.
Figure 9.7 on page 200 (OpenStax) of your text shows the price and output charged by a pure monopolist. The same figure can be used to show that, under conditions of perfect competition, price and output would be determined by the point at which the marginal cost curve (=the market supply curve under perfect competition) intersects the demand curve. Compare the outcome in a perfectly competitive market with the outcome in a market dominated by a single firm with monopoly power. Which market is likely to have (explain your answer in each case):
greater productive and allocative efficiency (i.e. no deadweight loss, make sure you define productive and allocative efficiency). What steps can government take to increase the competitive environment?