Reference no: EM132519344

A. Kuhner Rice is making economic profit currently on its sales of rice. Graph its profit/loss situation in rice sales and label price and quantity. Shade and label the areas of economic profit, consumer surplus, producer surplus, and deadweight loss.

B. The government becomes concerned that Kuhner Rice is price-gouging on a staple food item like rice. The government decides to regulate the price of rice using average cost pricing method (see p. 396-398) at $2 a bag. Make a new graph showing the regulated price and quantity. Again, shade the area of profit or loss, consumer surplus, producer surplus, and any deadweight loss.

C. Under the new regulations, Kuhner Rice decides that it is no longer profitable to produce rice. It sells off its rice farms, which allows many small rice farmers to pop up and compete in Kuhnlandia. Sketch a graph which labels the new price and quantity in a perfectly competitive market. (Hint: Draw the classic monopoly graph but show price and quantity if it were competitive. Page 385 has a good graph for this. Note that Supply = MC! This is important to note because suppliers won't supply at prices that are below their marginal costs.)

D. Short answer questions:

a. Compare the monopoly's price and quantity with that of a perfectly competitive firm's. Which is better for the consumer?

b. How can government regulation of a monopoly increase the allocative efficiency of the monopoly?