Make the assumption that economy has no external effects

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Make the assumption that an economy has no external effects and all actors are perfectly informed. In addition, one good is produced by a firm who is a non-discriminating monopolist (known as Frontier Firm). Any other output/input markets are perfectly competitive. Frontier Firm's quantity of output demanded is 500 - 2P. Their long run marginal cost of production is 200 + Q

A) Without any government action what so ever. How much would Frontier Firm produce, what would its price be, and what would its profit be?

B) Frontier Firm was offered a subsidy of $200 per unit by the government. Answer Part A again, assuming Frontier Firm chooses to take the subsidy.

C) Will the subsidy in Part B allow for an efficient allocation of resources? (hint: Does it violate any the three necessary and sufficient conditions?)

Any use of diagrams to help illustrate the answer would be appreciated.

Reference no: EM13869370

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