Regulation under a monopoly The inverse demand for a product is P(Q) = 100 (1/2)
ID: 1167668 • Letter: R
Question
Regulation under a monopoly
The inverse demand for a product is P(Q) = 100 (1/2)Q. Production is associated with a marginal private cost, MCP(Q) = Q, and a constant marginal external cost, MCE = 25.
(a) Graph inverse demand, marginal revenue, marginal private cost, and marginal social cost on a single graph. Label the axes.
(b) What is the unregulated equilibrium? (Define in terms of price and quantity.)
(c) What is the socially optimal price-quantity pair?
(d) What is the deadweight loss under an unregulated monopoly in this case?
(e) What should the regulator do?
Explanation / Answer
Regulation under a monopoly:-
Because monopolies lower the economic output of a society, and therefore, its wealth, governments regulate monopolies with the objective of benefiting societies more than would be the case if the monopolies maximized their profits. There are 3 major methods to increase the benefits of monopolies to society.
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(a) In economics, an 'inverse demand function', P = f1(Q),is a function that maps the quantity of output demanded to the market price (dependent variable) for that output. Quantity demanded, Q, is a function of price; the inverse demand function treats price as a function of quantity demanded, and is also called the price function.[1] Note that the inverse demand function is not the reciprocal of the demand function—the word "inverse" refers to the mathematical concept of an inverse function.
(B) In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall general equilibrium. General equilibrium theory contrasts to the theory of partial equilibrium, which only analyzes single markets. As with all models, general equilibrium theory is an abstraction from a real economy; it is proposed as being a useful model, both by considering equilibrium prices as long-term prices and by considering actual prices as deviations from equilibrium. in this case the market does not have a command on there production & supply chains. its contrasts with a unregulated market.
(c) Socially Optimal Price is when P=MC on a monopoly graph. Out of any price/quantity combination for a monopoly, this is the one that is best for society. It occurs when the government gets involved with the monopoly and forces them to produce at this socially optimal level. There is one big problem with this pricing, the monopoly is making losses. Therefore, the government would have to provide money for the monopoly (like a subsidy) to compensate for their losses.
(d) Deadweight loss measures allocative inefficiency as the reduction in consumer and producer surplus caused by monopoly restrictions on output. n unregulated, single-price, profit-maximizing monopoly will produce and sell the quantity of output that makes marginal revenue equal to marginal cost.
(e) in a simple way, proper installation and maintenance of the regulator during its time in service will pay big dividends in the form of increased customer satisfaction and fewer.