The oil price shock of 1980 sent gasoline prices sharply higher. Coal prices moved in sympathy with...

Question

The oil price shock of 1980 sent gasoline prices sharply higher. Coal prices moved in sympathy with oil prices, with the result that coal companies earned pure economic profits. Since coal is a homogeneous good and the market is competitive, what happend in this market. (Diagram as appropriate).

Robert · Accepted Answer

Answer 1)  
A) Given, the local demand for sweatshirts Q = 200 - 5P or P = 200/5 – Q/5 or 
P = 40 – 0.2Q and the average marginal cost per printed sweatshirt $8.00 
The optimal output under monopoly condition will be found by 
differentiating profit function with respect to output and keeping MR = MC 
therefore we have, 
Π = TR – TC or Π = P*Q – TC 
Π = 40Q – 0.2Q*Q – TC 
Differentiation profit function with respect to output and putting it equal to 
zero we have, 
D Π/DQ = 40 – 0.4Q – MC = 0, 
32 = 0.4Q [Using MC= 8] 
Q = 80  
P = 40 – 0.2*80 = $ 24 
Therefore, price under monopoly will be $24, output will be 80 units and 
profit under monopoly will be 
 Π = 24Q – 8*Q = 24*80 – 8*80 = $1280
B) A perfectly competitive firm founds its optimal output at  
Price = MC, therefore, given the local demand for sweatshirts Q = 200 - 5P 
or P = 200/5 – Q/5 or P = 40 – 0.2Q and the average marginal cost per 
printed sweatshirt $8.00. We have, 
40 - 0.2Q = 8 
Q = 160 and P = 40 – 0.2*160 = $ 8 
Therefore,

The oil price shock of 1980 sent gasoline prices sharply higher. Coal prices moved in sympathy with oil prices, with the result that coal companies earned pure economic profits. Since coal is a...

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