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Question 1

Monopolies do not utilize resources at their ideal potential efficiency. The figure below exemplifies the inefficiency in allocating resources.

Source: (Frank et al., 2018)

To maximize profits, the seller charges high prices at output equal to Q where the firm is functioning at the highest point on the ATC curve making the resource allocation inefficient.

A single seller creates price stability by setting prices and sticking to them because the market lacks other firms offering alternatives. Monopolists also provide effective and efficient services that consumers need. However, monopolies exploit customers by producing substandard products and selling them at premium prices (Bade & Parkin, 2017). The seller is also capable of price discrimination by offering similar products to different customers at different prices.

Question 2

Perfect competition is used in benchmarking allocative efficiency because it focuses on the optimal distribution of services and goods as well as customers’ preferences.

Source: (Frank et al., 2018)

As outlined in the figure above, firms in perfect competition markets function at allocative efficient levels given that at Q1, P=MC. The prices buyers are willing to pay correspond to the marginal utility they receive.

Monopolies do not have allocative efficiency because they have market power that allows them to increase prices beyond the marginal cost of production to lower customer surplus.

Here, the monopolies set prices of Pm, which is allocatively inefficient since at Qm output, prices is higher than MC.

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Constant cost industry or firm is one whereby external diseconomies and economies are at equilibrium. The figure below shows the long run equilibrium of a firm and industry functioning under constant cost. In this structure, no matter how many firms join or leave the market, all firms maintain similar sets of cost curves (LMC and LAC) with which it started.
In an increasing cost market, expansions result in rise in industry and firm outputs, which force costs to increase (Frank et al., 2018). Here, the industry is in equilibrium at output OQ and price OP. Corresponding to price OP, all firms produce Oq and are in equilibrium whereby P = AR = MR = LAC.

Question 6

Tax on the polluter based on damages caused can mitigate pollution. As outlined in the figure below, X is the output level if pollution costs are flouted while K is the ideal production level.

The government can adopt a regular flat-rate tax QZ on output – this will remove any incentives to raise production above the accepted level K.

Minimizing the overproduction of farm outputs as shown below can also reduce pollution. A farmer produces Q1 whereby marginal revenue equals marginal private cost; however, the socially efficient output level is Qo, which considers the extra social costs of farm production.

Question 7

In microeconomic policy, whenever the price per unit surpasses the average variable cost per unit whether in the long or short run, the outcome is positive. This implies that a firm is making profits from selling its services or products and its operations should continue (Bade & Parkin, 2017). Since profit is the goal of any firm, the need to continue operation becomes inevitable.
The production point whereby marginal cost and marginal revenue are equivalent is a point of zero economic profit (the break-even point). In this case, total cost minus total revenue is zero, and price (P) per unit minus average cost (AC) per unit is zero.