1. Perfect Competition

Consider the following diagram of a competitive firm

Figure 1. Competitive firm(Widgets per hour)

a) What is the profit (loss) maximising quantity the firm should produce at a price of $1.50? (1 Mark)

b)Calculate the firm's profit at a price of $1.50. (2 marks)

c) At a price of $1.50 is the industry in a long-run equilibrium? Explain (3 Marks)

d) At a price below $1.50 does the firm produce output? Explain (2 Marks)

2. Monopoly

A drug company takes out a patent on a vaccine for a deadly virus. The firm can produce the vaccine for a constant marginal cost of $0.20.

a) How does the firm determine what quantity to produce? (1 Mark)

b) Assume the profit maximising level of production is 4,000 units per hour. At this level of production average total cost is $1.20 per unit, average fixed cost is $1 per unit and it is charging $4.20 per unit. What is the level of profit per hour?(2 Marks)

c) If the company can segment the market what strategy can it use to increase profit? (2 Marks)

d) What are the welfare implications of using this strategy? (Hint: use the concepts of consumer and producer surplus) (2 Marks)