31. Return to Figure 9.2. Suppose Po is $10and P₁ is $11. Suppose a new firm with thesame LRAC curve as the incumbent tries tobreak into the market by selling 4,000 units ofoutput. Estimate from the graph what thenew firm's average cost of producing outputwould be. If the incumbent continues toproduce 6,000 units, how much output wouldthe two firms supply to the market? Estimatewhat would happen to the market price as aresult of the supply of both the incumbentfirm and the new entrant. Approximately howmuch profit would each firm earn? Cost or Price ($)a aPo4,000 6,000 8,000Demand12,000 16,000 20,000OutputLRACFigure 9.2 Economies of Scale and Natural Monopoly In thismarket, the demand curve intersects the long-run average cost(LRAC) curve at its downward-sloping part. A natural monopolyoccurs when the quantity demanded is less than the minimumquantity it takes to be at the bottom of the long-run average costcurve.

Profit is the gap between the income and the expense of a firm. The LRAC curve is the route a firm…

31. Return to Figure 9.2. Suppose Po is $10 and P₁ is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the graph what the new firm's average cost of producing output

31. Return to Figure 9.2. Suppose Po is $10 and P₁ is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the graph what the new firm's average cost of producing output

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter9: Monopoly

Section: Chapter Questions

Problem 31P: Return to Figure 9.2. Suppose P0 is 10 and P1 is 11. Suppose a new firm with the same LRAC curve as...

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Question

31. Return to Figure 9.2. Suppose Po is $10
and P₁ is $11. Suppose a new firm with the
same LRAC curve as the incumbent tries to
break into the market by selling 4,000 units of
output. Estimate from the graph what the
new firm's average cost of producing output
would be. If the incumbent continues to
produce 6,000 units, how much output would
the two firms supply to the market? Estimate
what would happen to the market price as a
result of the supply of both the incumbent
firm and the new entrant. Approximately how
much profit would each firm earn?

Cost or Price ($)
a a
Po
4,000 6,000 8,000
Demand
12,000 16,000 20,000
Output
LRAC
Figure 9.2 Economies of Scale and Natural Monopoly In this
market, the demand curve intersects the long-run average cost
(LRAC) curve at its downward-sloping part. A natural monopoly
occurs when the quantity demanded is less than the minimum
quantity it takes to be at the bottom of the long-run average cost
curve.

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