Author Question: The ERT Company sells lead pencils in a perfectly competitive market for 5 per box of a dozen ... (Read 98 times)

CORALGRILL2014 · **on:** Jun 29, 2018

The ERT Company sells lead pencils in a perfectly competitive market for 5 per box of a dozen pencils. The firm currently produces 2,500 boxes of lead pencils each week and average total cost at this level of production is 5.15 .

What level of profit is this firm earning? Explain.

Question 2

The above figure represents a perfectly competitive industry that is taken over by a single firm and operated as a monopoly.

a) What was the competitive price and quantity?
b) What is the monopoly price and quantity?
c) What area represents consumer surplus under perfect competition?
d) What area represents consumer surplus under monopoly?
e) What area represents the deadweight loss of monopoly?

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

Answer to Question 1

The ERT Company is earning negative profits of 375 per week. This can be calculated by taking total revenue (5 x 2,500 = 12,500) and subtracting total cost (5.15 x 2,500 = 12,875).

Answer to Question 2

a) The competitive price was P2 and the competitive quantity was Q2.
b) The monopoly price is P3 and the monopoly quantity is Q1.
c) The consumer surplus with perfect competition is the area P4P2c.
d) The consumer surplus with monopoly is the area P4P3a.
e) The deadweight loss from the monopoly is the area abc.