The question
Name: ______________________ Date: ____________ A monopoly from a key resource: price, profit, deadweight loss, elasticity and a per-unit tax (10 points)
Corvane Labs (invented) owns the only supply of a rare reagent that home test kits for water quality need, so no other firm can make the kits and Corvane is the only seller. It maximizes profit and is earning a positive economic profit. Its marginal cost curve is U-shaped and passes through the minimum of its average total cost curve.
Data
Corvane Labs at its profit-maximizing output
| Measure | Value |
|---|---|
| Quantity of kits | 200 |
| Price per kit (dollars) | 40 |
| Average total cost per kit (dollars) | 25 |
| Marginal revenue and marginal cost (dollars) | 18 |
(A) Draw a correctly labeled graph for Corvane Labs showing demand, marginal revenue, marginal cost and average total cost, and show its profit-maximizing price and quantity, labeled PM and QM. [2 points]
(B) Shade the area of Corvane Labs' economic profit. [1 point]
(C) Shade the deadweight loss caused by the monopoly. [1 point]
(D) Calculate Corvane Labs' weekly economic profit using the data in the table. Show your work. [1 point]
(E(i)) Identify whether demand for the kits is elastic, inelastic or unit elastic at QM. [1 point]
(E(ii)) Explain your answer to E(i). [1 point]
(F(i)) The government places a per-unit tax of $5 on each kit Corvane Labs sells. Show the effect of the tax on your graph in part A by shifting the curve or curves that change. [1 point]
(F(ii)) Identify what happens to the quantity of kits Corvane Labs sells and to the price it charges after the tax, compared with QM and PM. [1 point]
(F(iii)) Identify what happens to the deadweight loss in the market for kits after the tax, and explain. [1 point]