Question

Marin County Enterprises has a monopoly on the production of lunar-powered homes and has the normal U-shaped average cost curve. At its present profit-maximizing output and price, it is able to earn a positive economic profit. Show graphically, the effects in the product market (output, price, profit, and so on) of each of the following changes:

A). Lunar-powered homes become a nationwide fad.

B). The cost of labor (a variable factor of production) rises.

Answer 1

Initially, in the market for Lunar-powered homes, the price, output is Po, Qo, corresponding to equilibrium point A.

1. After Lunar-powered homes become a nationwide fad, the demand increases for every level of price. Thus, the demand curve shifts from D0 to D1, which further result in the shift of MR curve from MR0 to MR1, This pushes the price to P1 and the quantity of homes increases to Q1. The new monopoly equilibrium is at B, corresponding to MC = MR1. The situation is depicted in the diagram below:

2. After the cost of labor (a variable factor of production) rises, the MC increases for every level of price. Thus, the MC curve shifts from MC0 to MC1, which further result in the shift of MC curve from MC0 to MC1, This pushes the price to P1 and the quantity of homes decreases to Q1. The new monopoly equilibrium is at B, corresponding to MC1 = MR. The situation is depicted in the diagram below: