A161extopic2

Question 1

1. There is one art museum on the island of Watsonia. The museum's demand and cost curves
are shown in the graph below. The museum currently relies on an admission charge for
some of its funding. Its directors are debating about how to set the admission charge.
(a) Using the labeling of the graph above, identify the price and quantity associated
with the following objectives.
(i) The museum maximizes its profit. P5, Q2
(ii) The museum maximizes its total revenue. P3, Q4
(iii) The museum maximizes the sum of consumer and producer surplus. P4, Q3 (MC=D)
(iv) The museum maximizes its attendance, as long as it breaks even. P2, Q5 (ATC=D)
b
When the attendance is Q1, is the demand price elastic, inelastic, or unit elastic?
Explain.
Elastic. At Q1 MR>0or Q1 is less than the Revenue Maximizing
attendance of Q4

Assume that the price is set at P2. Assuming the existence of an opportunity cost,
indicate whether the museum's accounting profits would be positive, negative, or
zero. Explain why.
Positive. At P2, attendance would be Q5 and P = ATC, so economic costs are
zero. With the existence of an opportunity cost, accounting profits must be
positive, because economic profits = accounting profits minus opportunity
costs

(d) Assume that the government decides the museum should charge no admission and
agrees to
subsidize the museum for any losses.
i

Using the labeling in the graph, identify the museum's attendance under that
circumstance. Q7
(ii) Would the outcome be allocatively efficient? Explain. No. P<MC

Question 3
(a) Draw a correctly labeled graph showing a typical moropoly that is maximizing
profit and indicate each of the following
(i) Price (ii) Quantity of output (iiii)Profit

Profits

(b) Descrihe and explain the relationship between the monopolist's demand curve and
marginal revenue curve.
For monopolist, both marginal revenue and demand are downward- slopping curves
marginal revenue will always be less than demand for a given quantity. This is due to
monopolist demand curve, is the same as its average revenue curve and for a
monopolist, either marginal revenue will decrease or quantity increase.
(c) Label each of the following on your graph in part (a):
(i) Consumer surplus
(ii) Deadweight loss