Directions: Answer the following questions in ink on a separate sheet of paper. Be sure to label your graphs and be clear, concise and complete in your answers.

1. Assume that Dillman Inc. has a monopoly in the production and sale of a new device that detects and destroys gophers. Dillman Inc. is currently incurring short-run profits.

a.) Draw a correctly labeled graph of Dillman Inc. and show each of the following:

i. The profit -maximization price and output

ii.The area of profit.

a) Explain how long Dillman Inc. will maintain their profit and why.

b)Assume Dillman Inc. is maximizing profit, what will occur if they raise their price?

c) If the demand for this gopher killing device increases, explain what will happen to the following:

i.Profit-maximizing output

ii.Total cost.

2. Assume that the market for Yak Fat coats, very warm in the winter in Tibet, is perfectly competitive and in long run equilibrium.

a) Using a correctly labeled graph of supply and demand, show each of the following:

i.The equilibrium price label P1 and the quantity labeled Q1

ii.The area representing total consumer surplus, labeled CS

iii. The area representing total producer surplus, labeled PS

a) Supposes the government places a price ceiling on this market. Redraw your graph and label the ceiling as Pc. Shade the area of total surplus after the imposition of the ceiling.(Hint, remember what I said about surplus and production)

b) Suppose the demand for Yak Fat coats decreases, it's a warm winter in Tibet, but the price ceiling remains in effect, indicate what will happen to the following after the shift of demand:

i.Consumer surplus

ii.Producer Surplus