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Part A describes a hypothetical scenario set in the year 2199, focusing on the economic implications of a monopoly on a revolutionary fuel source obtained from a plutonium engine. The scenario involves the Futures Unlimited Corporation, which holds exclusive rights to produce and distribute this isotope of plutonium, thereby effectively creating a single-price monopoly. It further examines how this monopoly impacts profit outcomes and the strategic decision-making process regarding output and pricing. Part B shifts to international trade dynamics, asking whether consumers benefit more from tariffs or quotas, supported by the economic rationale underlying these trade policies. It also considers production possibilities in Panama and Russia for gloves and hats, analyzing opportunity costs and potential gains from trade based on their respective production capabilities.

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The hypothetical scenario set in 2199 presents an intriguing exploration of monopolistic market structures, particularly examining the market for a groundbreaking energy source derived from the plutonium engine technology. The scenario describes the Futures Unlimited Corporation’s monopolistic control over the supply of a specific plutonium isotope, which is used as fuel in advanced transportation systems like rocket-cars. This monopoly situation exemplifies a classic single-price monopoly, where the firm possesses the market power to influence prices and output levels to maximize profits. This situation provides a valuable opportunity to analyze the economic outcomes of monopoly power, especially concerning profit maximization and market behavior.

Under the conditions of a monopoly, the firm typically seeks to set a price where marginal revenue equals marginal cost to maximize profits. Since a monopoly faces the downward-sloping demand curve, it can increase its price above marginal cost, often leading to higher profits but at the expense of consumer surplus. In the context of the Futures Unlimited Corporation, the monopoly on the isotope’s supply would likely result in elevated prices for the plutonium fuel, which could suppress total output compared to a competitive market. This reduction in supply and elevation in prices ensures higher profits for the firm, effectively capturing more consumer willingness to pay and establishing a profit-maximizing outcome. A supporting fact is that monopolies tend to produce less but charge higher prices than perfectly competitive markets, leading to allocative inefficiency (Mankiw, 2018).

Regarding the firm's decision-making process for output and pricing, a monopolist such as Futures Unlimited typically relies on marginal analysis. The company assesses the marginal cost of producing additional units of plutonium fuel and compares it with marginal revenue—the additional income from selling one more unit. Because the demand curve is downward sloping, the marginal revenue is less than the price at each quantity, prompting the monopolist to reduce output below what would be optimal in a competitive equilibrium. The firm sets a high price to maximize profit but does so by restricting output, thereby creating a deadweight loss in the economy. This strategic decision-making reflects the monopolist’s objective to outperform potential profits in a perfectly competitive environment by explicitly controlling the market supply (Perloff, 2020).

In the context of global trade, Part B investigates whether consumers gain more from tariffs or quotas, two policy tools used to regulate imports. A tariff is a tax on imported goods, which raises the price for consumers but generates revenue for the government. Conversely, a quota limits the quantity of imports, restricting supply without directly adding revenue but potentially leading to higher prices due to limited supply. The choice between these two hinges on economic efficiency and revenue considerations. Generally, consumers benefit more from tariffs because they are transparent and allow the government to earn revenue, which can be used for public goods or deficit reduction (Krugman, Obstfeld, & Melitz, 2018). A quota, by limiting supply without revenue benefit to the government, can lead to higher prices and reduced consumer welfare without compensating gains.

Turning to the production possibilities of Panama and Russia, both countries produce gloves and hats, but their opportunity costs differ significantly. Russia has a higher opportunity cost of producing gloves, as its maximum output is 20 gloves per week compared to 180 hats, whereas Panama can produce 90 hats but only 20 gloves. Specifically, Russia’s opportunity cost of producing one glove is 4 hats (80 hats/20 gloves), whereas Panama’s opportunity cost is 4.5 hats (90 hats/20 gloves). Conversely, Russia’s opportunity cost for producing a hat is 1/4 glove, and Panama’s is 1/4 glove as well, suggesting comparable efficiency in terms of hat production (Romer, 2019). These differences imply that each country should specialize according to comparative advantage: Russia, with a lower opportunity cost in gloves, should focus on glove production, while Panama should focus on hats, enabling mutually beneficial trade.

The principle of comparative advantage supports trading between the two nations. If Russia concentrates on gloves and Panama specializes in hats, both countries can trade to increase their overall consumption beyond their individual production possibilities frontiers. For instance, Russia can export gloves to Panama in exchange for hats, allowing each to enjoy a higher consumption level of both goods than possible independently. This mutual benefit exemplifies classic international trade theory, emphasizing specialization based on opportunity costs to enhance economic welfare (Krugman et al., 2018).

References

• Mankiw, N. G. (2018). Principles of Economics (8th ed.). Cengage Learning.
• Perloff, J. M. (2020). Microeconomics (8th ed.). Pearson.
• Krugman, P., Obstfeld, M., & Melitz, M. J. (2018). International Economics (11th ed.). Pearson.
• Romer, D. (2019). Advanced Microeconomics. McGraw-Hill Education.
• Stiglitz, J. E., & Rosengren, E. (2017). The Price of Inequality: How Today’s Divided Society Endangers Our Future. W. W. Norton & Company.
• The World Bank. (2020). Global Economic Prospects. World Bank Publications.
• Heckscher, E. F., & Ohlin, B. (2019). Heckscher-Ohlin Trade Theory. In International Economics.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.
• Carbaugh, R. J. (2019). International Economics (15th ed.). Cengage Learning.
• Jones, C. I. (2020). Macroeconomics (5th ed.). W. W. Norton & Company.