Q2: A natural resource extraction firm monopolizes the market in Australia. The total quantity of the associated natural resource to be extracted by this monopoly firm is 20 units, the rate of return is 20%pa the price now is $60 per unit, the price in 1 year is $110 per unit and the cost per unit is $30 per unit now and $40 per unit in 1 year.

a/ Draw a diagram (with ATC, MC, MR and price) showing the firm making a greater than zero economic profit. You do not need to place numbers on your diagram. Explain what you have drawn in words. (5 marks)

b/ How could this firm use economic profits to fund research and development and also prevent new entrants in the short run? Explain your diagrams and answer in words. (5 marks)

c/ Evaluate the statement: it is possible that an economic shock would cause the monopoly to experience economic loss (negative economic profit). Answer this by drawing curves and explaining them in words. (5 marks)

d/ Government wishes to ensure that 80% of natural resources are available for extraction in 1 year. So Government intervenes and provides a subsidy per unit extracted in order to reduce the marginal extraction cost but only in one of the extraction points in time (i.e., either now or in 1 year). In what year does the government provide this subsidy? Also provide an estimate of this subsidy per unit extracted. Explain your working and answer in words. (10 marks)