2023 AP Microeconomics FRQ Set 2 #3 (Natural Monopoly)

 2023 AP Microeconomics FRQ Set 2 #3 (Natural Monopoly)

A) Is the firm shown in this graph a natural monopoly? Explain.

 

Yes! The firm is a natural monopoly in that the firm’s ATC curve is downward sloping throughout the range of the demand curve.

 

B) Using the labeling from the graph, identify the area representing the deadweight loss for this profit-maximizing monopoly.

 

First, Find the Profit Maximizing Price & Quantity

Second, Find the Socially Optimal Quantity

Area of DWL is equal to (bfg)

C) In order to improve resource allocation, the government sets a price that results in the firm earning zero economic profit.

(i) Using labeling from the graph, identify the price and resulting quantity the firm would produce.

 

The firm would earn zero economic profit when it produces where the 

P = ATC

P = P3 & Quantity = Q3

(ii) Will this government policy eliminate the deadweight loss? Explain using labeling from the graph.

When the firm is producing at break-even (P=ATC) (Q3)

It still isn’t producing at the socially optimal quantity (P = MC)

There is no DWL at the Socially Optimal Quantity (Q4)

There will still be DWL

And is equal to the triangle (cjg)

D) Instead, the government decides to set a price that results in the socially optimal quantity of output. Will the firm earn a positive, negative or zero economic profit? Explain using the labeling from the graph.

The firm is making a negative economic profit (loss) as the 

Price is less than the ATC at the socially optimal quantity (Q4)

Area of economic loss is (P2 - P1) x Q4