Question

1. Merkel, Inc. has a monopoly in producing coconut oil.
2. Draw a graph to show the profit maximization by Merkel, Inc. Label the profit maximizing quantity, QM. Show that Merkel, Inc. is earning negative economic profit [that is, economic loss]. Label the loss either by shading or by using the letters to define the area.

Make sure all the curves, axes and lines are labeled appropriately.

2. Suppose that the coconut oil is produced in a perfectly competitive market. Use the graph you drew for part a) to show the profit maximizing quantity [label it Qc] produced by the perfectly competitive industry.
3. Compare the competitive price with the monopoly price. Does the competitive industry earn loss or the profit situation is different now? Explain.
4. Use the profit situation [loss or economic profit as drawn] to explain the long run adjustment by the firms in perfect competition.

Answer 1