Question

Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power.

 The following graph shows the demand (D) and supply curves (S = MC) in the market for hot dogs.

 Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from competition. Use the green point (triangle symbol) to shade the area that represents consumer surplus, and use the purple point (diamond symbol) to shade the area that represents producer surplus.

 Assume that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the new monopoly's marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm.

 Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. Use the green points (triangle symbol) to shade the area that represents consumer surplus, and use the purple points (diamond symbol) to shade the area that represents producer surplus.

Answer 1