Can someone help me with this question with explanations? suppose that in order
ID: 1157709 • Letter: C
Question
Can someone help me with this question with explanations?
suppose that in order to protect industry profits from recent cost încreases, all ?rms in the giant cookie market merged to found 1 giant giant cookie manufacturer, with new cost function c(y) 96 2y +6y2. Consumer demand remains Qd 492 - 4p 1. Find the market inverse demand for giant cookies 2. Find the quantity supplied by a profit maximizing monopolist, the market price, and the monopolists profit. 3. Find the consumer surplus, producer surplus, and deadweight loss created by the monopoly. 4. The cookie monopolv argues that the deadweight loss created by their monopoly is justified because the merger resulted in decreased production cost. Is this argument justified when comparing consumer surplus, producer surplus, and total welfare to the perfectly competitive market in the previous problem? Who benefits and who loses from the merger? 5. Suppose the government institutes a price cap at p -70 in an attempt to move closer to the competitive equilibrium. Find the quantity produced, market price, consumer surplus, producer surplus, and deadweight loss. Who gains and who loses from regulation? Is the regulation welfare improving? 6. Calculate the elasticity of demand at the monopoly's optimal y 7. Explain why the giant cookie monopoly has little market power.Explanation / Answer
Ans a)
Demand is given as
Q=492-4p
P=(492-Q)/4=123-0.25Q
Ans b)
For Monopolist Profit maximising condition is MR=MC
C(y)=96-2y+6y^2
MC=-2+12y and R=Price*y=(123-0.25y)*y=123y-0.23y^2
MR=123-0.46y
MR=MC
123-0.46y=-2+12y
125=12.46y
125/12.46=y=10(approx.)
Price=123-0.25(10)=120
Profit=R-C=P*y-96+2y-6y^2=120*10-96+2(10)-6(10)^2=524
Ans c)
Consumer Surplus=1/2(123-120)*(10)=15
We have no Supply Curve for monopolist then no Producer surplus
If Prefect competition P=MC
492-y=-2+12y
494=13y
y=38
P=123-0.25(38)=113.5=113
Consumer Surplus=1/2(123-113)(38)=190
DeadWeight Loss=CS in Monopolist-CS in Perfect Competition=15-190=-175
Ans 6)
Elasticity of Demand=dy/y*p/dp=(dy/dp)*(p/y)
dy/dp=-4 and p/y=(123-0.25y)/y=123/y-0.25
Elasticity of Demand=1-(492/y)