Option 1

Economania is the only supplier of recreational goods for a small island. It is currently making economic profit.

(a) Draw a graph for Economania. Make sure to label:

i. Economania's profit-maximizing quantity, Qf

ii. Economania's profit-maximizing price, Pf

(b) Shade the deadweight loss involved in Economania's profit-maximizing production.

(c) If Qf = 10,000 units and Pf = $2, what is Economania's total revenue?

(d) Property taxes go up and increase Economania's fixed costs. Illustrate the effect of this on your graph from part (a).

(e) How would the fixed cost increase from part (d) affect Economania's economic profit and the deadweight loss? Explain each.

(f) What would need to be the case for Economania to be a natural monopoly?

(g) An economic downturn shifts the demand for Economania's product to the left. At what point would the monopoly firm shut down production?

(h) If the barriers to entry fell and Economia's market structure became perfect competition, what would happen to its profits in the long run?