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MSU Economics Market Structures Optimal Price and Output Project

MSU Economics Market Structures Optimal Price and Output Project


Part 1: Market Structures and Government Policies

1. Four Types of Market Structures:

a. Perfect Competition: In this market structure, there are numerous small firms producing homogeneous products. Examples include agricultural products like wheat or vegetables.

b. Monopoly: A single firm dominates the entire market, giving it substantial control over price and quantity. An example could be a local utility company.

c. Monopolistic Competition: Numerous firms offer differentiated products, giving them some control over price. Restaurants and clothing stores are examples.

d. Oligopoly: A few large firms dominate the market, leading to interdependence in decision-making. Automobile and electronics industries often exhibit oligopoly characteristics.

2. Lightning Volt Automotive’s Market Structure: Based on the information provided, if Lightning Volt Automotive is the only domestic firm with a secure supply chain of semiconductor chips, it would likely operate as a monopoly in the market. This is because it has substantial control over supply and can potentially set prices and quantities without direct competition.

3. Pricing and Production for Lightning Volt Automotive: As a monopoly, Lightning Volt Automotive would set its prices based on its understanding of consumer demand elasticity. It would aim to maximize its profits by producing the quantity where marginal cost equals marginal revenue.

4. Government Policies and Electric Vehicle Sales: The U.S. federal government’s policies addressing climate change could have significant effects on the sale and distribution of electric vehicles. Potential policies include tax incentives for electric vehicle purchases, stricter emission standards for traditional vehicles, and investments in charging infrastructure. These policies could boost electric vehicle demand and reshape the automotive market.

Now, moving on to Part 2: Calculating Profits and Production Decisions:

1. Calculating Profits and Losses: Profits are calculated by subtracting total costs from total revenue. Total revenue is the price per unit multiplied by the quantity sold, and total costs include both fixed and variable costs.

2. Optimal Production Level: The most efficient level of production is where marginal cost (the additional cost of producing one more unit) equals marginal revenue (the additional revenue from selling one more unit). This ensures maximum profit.

3. Average and Marginal Cost Curves: The average cost curve shows the average cost per unit of production at different levels of output. The marginal cost curve illustrates the change in cost for producing one additional unit. The optimal production level is where these curves intersect.

4. Expansion and Contraction Decisions: Firms decide to expand when marginal revenue exceeds marginal cost, indicating increased profitability. Conversely, contraction might be considered if marginal cost exceeds marginal revenue.

5. Shutdown Decision: A firm’s shutdown point is where price falls below average variable cost. In the short run, it’s better to produce even at a loss if price covers variable costs. To avoid closure, firms can reduce variable costs, seek external funding, or wait for market conditions to improve.

Please let me know if you need more detailed explanations or specific examples for any of these points.

MSU Economics Market Structures Optimal Price and Output Project



Part 1

As an economic consultant for Lightning Volt Automotive, you are tasked with identifying the four different types of market structures and discussing the market structure that the firm is currently operating in and why. If Lightning Volt Automotive were fortunate enough to be the only domestic firm with a secure supply chain of semiconductor chips in the United States and globally, identify whether Lightning Volt Automotive would transform into another type of market structure and why. Since the federal government is enacting new policies to address climate change, explain how government policies could affect the sale and distribution of electric vehicles globally.


Address the following in a Word document.

  • Describe the four different types of market structures and their characteristics. Include relevant examples. Copy the table attached here into your Word document. (Eco3250 5 Table)
  • Identify and explain the market structure Lightning Volt Automotive operates in.
  • Discuss how Lightning Volt Automotive sets its prices in the market and how it determines the optimal number of vehicles to produce in the market.
  • Explain how the U.S. federal government influences the sale of electric vehicles within our macroeconomy.

Part 2

As an economic consultant, it’s important to calculate Lightning Volt Automotive’s profits and losses given their current production costs. You will need to make sound economic decisions by determining the optimal level of production and stating whether the firm should contract, remain at the current level of production, or expand production levels. Even though the firm has recently been formed, it would be helpful to strategize the firm’s shutdown point if an external shock were to hit the economy.

  • Explain how profits and losses are calculated.
  • Use the Excel spreadsheet linked here for the following: (Eco3250 6 Template)
  • Fill out the table linked here given the levels of output and total costs. Identify the most efficient level of production.
  • Plot the average and marginal cost curves to illustrate the most optimal level of production.
  • Copy the table and the plot into your Word document (Eco3250 6 Table)
  • Explain how firms determine whether they should expand or contract their current operations.
  • Evaluate the firm’s shutdown decision. Identify ways in which a firm could avoid a potential closure.
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