Author Question: Suppose that, last year, the price of peanuts fell and the quantity sold increased. Use supply and ... (Read 115 times)

Deast7027 · **on:** Jun 29, 2018

Suppose that, last year, the price of peanuts fell and the quantity sold increased. Use supply and demand analysis to explain how these changes could have occurred.

What will be an ideal response?

Question 2

The above figure represents the cost and demand curves for a natural monopoly that is regulated using a marginal cost pricing rule.

a) What is the quantity?
b) What price is charged?
c) What area represents the consumer surplus when the firm is regulated using a marginal cost pricing rule?
d) What distance represents the firm's loss per unit when the firm is regulated using a marginal cost pricing rule?

morganmarie791 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

There are two possible causes of the drop in price: a decrease in demand or an increase in supply. If demand decreases, equilibrium quantity also falls. Thus, this could not be the cause of the changes in the peanut market. On the other hand, an increase in supply lowers equilibrium price while increasing the equilibrium quantity sold. Therefore, the supply of peanuts must have increased.

Answer to Question 2

a) The quantity is the efficient quantity, Q3.
b) The price is P2.
c) When the firm is regulated using a marginal cost pricing rule, the consumer surplus is equal to the area of the triangle P1dP2.
d) The loss per unit is the amount equal to the distance cd.