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Homework answers / question archive / Suppose you have been tasked with regulating a single monopoly form that sells 50-pound bags of concrete

Suppose you have been tasked with regulating a single monopoly form that sells 50-pound bags of concrete

Accounting

Suppose you have been tasked with regulating a single monopoly form that sells 50-pound bags of concrete. The firm has a fixed cost of $30 million per year and a variable cost of $4 per bag no matter how many bags are produced.

  • a. You find out that if you set the price at $5 per bag, consumers will demand 30 million bags. How big will be the size of the firm's profit or loss?
  • b. If consumers instead demand 40 million bags at a price of $5 per bag, what would be the firm's profit or loss?
  • c. Suppose that the demand is perfectly inelastic at 40 million bags, so that consumers demand 40 million bags irrespective of price. What price would you charge if you want the firm to earn only a fair rate of return? Assume as always that TC includes a normal profit.

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a) Average total cost

AFC = Total fixed cost / Quantity

AFC = 30 / 30

AFC = 1

ATC = AFC + AVC

ATC = 1+4

ATC = 5

Here, price is equal to 5 which is equal to average total cost so there will be no profit or loss.

b) AFC = Total fixed cost / Quantity

AFC = 30 / 40

AFC = 0.75

ATC = AFC + AVC

ATC = 0.75+4

ATC = 4.75

Profit = (P-ATC)*Q

Profit = (5-4.75)*30

Profit = $7.5 million

c) ATC = AFC + AVC

ATC = 30 / 40 +4

ATC = 4.75

To earn the fair return, the price should be charged to average total cost which will be equal to 4.75.

Perfectly Inelastic supply:

Perfectly Inelastic supply occurs when the supply is zero and as the demand increases then the price increases and quantity remains the same. It shows that price and quantity changes due to change in demand curve.

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