2016 (Monopoly) Paper 3 HL

2016 Monopoly Paper 3 HL

(c) (i) If fixed costs are $800,000 per month, calculate the total variable costs at a monthly output of 140,000 units.

Total Costs = 140,000 x 18 = 2,520,000

Fixed Costs = $800,000

TC - FC = VC

2,520,000 - 800,000 = $1, 720,000

(ii) Outline the difference between the explicit and implicit costs of production.

Explicit Costs = anything you spend money on (all FC & VC)

Implicit Costs = Opportunity Costs, sacrifice of income arising from the use of a resource owned by the firm

(iii) Define the term Normal Profit.

• Level of profit which is just sufficient to keep a firm in business
• Covering implicit costs = Accounting profit is positive
• The return which could have been earned from the next best alternative

(d) (i) Calculate the economic profit made by the cartel if the members jointly supplied 50,000 units per month.

Profit

 = Q(AR - ATC) or Q(P - ATC)

 = 50,000 (16-12)

 = $200,000

(ii) Identify the level of output which would maximize revenue for the cartel.

Revenue is maximized where the MR = 0 = Output (90,000)

(iii) Calculate the value of total revenue per month for members of the cartel if they produce at the revenue maximizing level of output.

The Revenue Maximizing output level is 90,000 units, the price at 90,000 units is $11.

Total Revenue = P x Q

$11 x 90,000 = $990,000