ECON 201 EXAM

1

• ECON 201 EXAM 2 OUTLINED ANSWERS
• QUESTION 16 Refer to text and class notes.
• QUESTION 17
• The lower costs means that existing firms now
  earn profits of area P1axy. This attracts new
  firms into the industry, shifting outward supply
  and decreasing price. This adjustment continues
  until P2 is reached, where profits are zero (see
  graph on next slide).

2
MARKET
S2
S1


FIRM
a
y
MC

• x

ATC
P1
P1
P2
d1 MR1, d3 MR3,
P2
D1
q2
q1
Q
3

• QUESTION 18
• In long run equilibrium, competitive markets
  result in an efficient outcome described as
  follows
• Resource Allocative Efficiency
• Profit max leads to allocative efficiency
• Firms produce at MR MC
• Since MR P, then P MC
• Marginal Benefit (demanders) Marginal Cost (to
  suppliers of using societys resources)
• Societys marginal value of resources equals
  Societys opportunity costs of resources
• Productive Efficiency
• Firms produce at lowest ATC in long-run
• Firms economizing on resource use
• Goods produced at lowest unit opportunity costs

4

• QUESTION 19
• In a competitive industry, the market
  price/quantity is determined by market demand and
  market supply (which is summation of all firms
  MCs). In the graph, the competitive output
  would be QC and price PC. But the monopoly
  restricts Q, maximizing profit at QM where MR
  MC since it faces the downward-sloping MR curve.
  Thus, the monopoly results in less Q and higher
  P.
• The problem with a monopoly is the Monopoly
  Welfare Cost, interpreted as follows
• Area (PMBDPC) Lost Consumer Surplus from the
  higher P.
• Area (PMBAPC) Monopoly Profit redistributed
  from consumer in the form of higher P (this is
  not part of welfare cost)
• Area (BAD) Welfare Cost, or resource
  misallocation. Another way to view it is that at
  any Q less than QC, P gt MC (meaning Societys
  Marg. Benefit of output gt Societys Marg. Cost of
  using resources to produce it)

B
PM
D
A
PC
MCATC
DMarket
MR
QM
QC