Question

5. Monopoly outcome versus competition outcome Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power. The following graph shows the demand (D) and supply curves (S = MC) in the market for hot dogs.

Answer 1

The graph shows that as quantity of hot dogs and the price of hot dogs increases, the supply of hot dogs will increase while the demand from customers will decrease. The point on the graph that will show the market price and quantity resulting from competition is where the supply and demand lines will meet (at 60 hot dogs and $3.5 per hot dog). The area that represents consumer surplus will be anywhere on the graph where the demand from the consumers is higher than the supply of the hot dogs. Conversely, the area that represents producer surplus will be anywhere on the graph where the supply of the hot dogs is greater than the demand from the consumers.