A.5: Consider the case of natural monopoly. Due to scale economies associated with the startup costs, the firm's ATC curve is falling throughout a wide range of output and is well above its MC curve. Demand (D) ATC MC Q 0.5 v (1) Plot the firm's MR curve on the diagram and label it as MR. (2) Identify the profit-maximizing output quantity and label it as QM on the quantity axis. (3) Identify the profit-maximizing price and label it as PM on the price axis. (4) Given QM, identify the firm's ATC and label it as ATCM on the price axis. (5) What is the expression for the firm's profit per unit of output? Answer: (6) What is the expression for total profit? Answer: (7) On the diagram, lightly shade the area for the firm's total profit. Label it as n (include a minus sign as needed). (8) Given PM, QM and D, lightly shade the area for consumer surplus. Label it as CS.A.4: Consider the operation that requires a one-time startup capital investment of $10,000,000. To simplify, assume that there is no other fixed cost involved in the production. Also, instead of the usual upward sloping MC curve, assume that the marginal costs of production is constant, $2. Total Quantity One-time Start Marginal Total Costs Average Total Up Costs Costs (MC) Variable (Q) Costs (VC) (TC) Costs (ATC) 0 $10,000,000 n.a So $10,000,000 n.a. $10,000,000 $2 $2 $10,000,002 $10,000,002 $10,000,000 $2 $4 $10,000,004 $5,000,002 W N $10,000,000 $2 $6 $10,000,006 $3,333,335 4 $10,000,000 $2 5 $10,000,000 $2 6 $10,000,000 $2 $12 $10,000,012 $1,666,669 7 $10,000,000 $2 $14 $10,000,014 $1,428,573 8 $10,000,000 $2 $16 $10,000,016 $1,250,002 $10,000,000 $2 18 $10,000,018 $1,111,113 10 $10,000,000 $2 (1) In the table above, fill in the blanks by computing the VC, TC and ATC for Q = 4, 5, and 10. (2) Compared with the ATC, is MC very small? Yes or no? Answer: (3) Currently, there is only one firm in the industry, producing 10 units. What is the firm's ATC? Answer: $_ (4) Suppose there is a potential entrant wanting to produce 5 units, What would be the potential entrant's ATC? Answer: $ (5) How many firm(s) would the industry most likely end up with? Answer: (6) Use two words to describe the market structure of this industry