Lessons
Assessments ? Gradebook
Email 2
Tools?
Aqueus is a classic monopolist earning positive economic profits.
(a) Draw a graph of Aqueus, labeling the profit-maximizing price $P_M$, the profit-maximizing quantity $Q_M$,
and the allocatively efficient quantity $Q_{SO}$. Shade the area of deadweight loss.
(b) If Aqueus is earning economic profits, why would other firms not enter the market? Explain.
(c) The government sets an effective price ceiling. On your graph from part (a), label this price $P_R$ and the
new output quantity $Q_R$.
(d) After the change in part (c), Aqueus's total revenue is $40 million. If the output quantity is now 5
million units, what must be the value of $P_R$?
(e) If ATC at $Q_R$ is $5, what is the economic profit or loss with the government intervention?
(f) How would the government action in part (c) affect the deadweight loss in Aqueus's market?
I
(g) Why might the government prefer to use antitrust policy to regulate Aqueus in the long run? Explain.
(h) Gaiana is a small firm that sells a complementary good to Aqueus's product in a perfectly competitive
market. Assuming Gaiana was in long-run equilibrium, illustrate the short-run effect of the government
intervention from part (e) on Gaiana supply and demand in a separate graph. If Gaiana earns any
economic profit or loss, shade it.
(i) Assume that Gaiana operates in a constant-cost industry. What would happen to Gaiana's firm supply
and demand in the long run? Explain.
Download
