Tuesday, October 1, 2019

2019 Micro Set 2, FRQ #1, Monopoly

2019 Micro Set 2, FRQ #1

a) Draw a correctly labeled graph for Gigantic and show each of the following.
(i) Price Profit maximizing
(ii) Profit max quantity
(iii) ATC curve
(iv) Consumer surplus

b) Demand for prescription drugs increases and Gigantic hires its workers in a perfectly competitive labor market.

i) What will happen to Gigantic's demand for warehouse workers? Explain.

One point is earned for stating that Gigantic Pharmaceutical Corporation’s demand for warehouse workers will increase and for explaining that the marginal revenue product of labor increases because of the increase in the product price.

ii) What happens to the wage rate paid by Gigantic to its warehouse workers and the number of warehouse workers it hires?

One point is earned for stating that the wage rate Gigantic pays to its warehouse workers will not change and the number of workers hired will increase.

(The wage rate doesn't change because Gigantic's product is protected by a patent and there is no competition in the production of Gigantic's drug. It is the only one that can produce and sell it,, so as the price goes up the market is unaffected so only the demand for Gigantic's drug increases. No competition for workers means no increase in wages in the market or for Gigantic's workers.)

c) After Gigantic's patent expires another firm enters the the market and makes an identical drug and sells it for a lower price.

i)What will happen to Gigantic's producer surplus?

Producer surplus is defined as the area below the price but above the supply curve. As the price falls the area of producer surplus decreases.

ii) What will happen to the consumer surplus in the prescription drug market? Explain.

Consumer surplus is defined as the area above the price but below the demand curve and as the price of the good decreases in the market consumer surplus increases.