In the table below are cost and demand data for a pure monopolist. Quantity Marg
ID: 1220236 • Letter: I
Question
In the table below are cost and demand data for a pure monopolist.
Quantity Marginal Average Marginal
demanded Price revenue cost cost
0 $35.00
1 32.00 $ 32.00 $48.00 $48.00
2 29.00 26.00 30.00 12.00
3 26.00 20.00 23.34 10.00
4 23.00 14.00 21.00 14.00
5 20.00 8.00 20.00 16.00
6 17.00 2.00 19.50 17.00
7 14.00 –4.00 19.28 18.00
8 11.00 –10.00 18.68 18.50
9 8.00 –16.00 18.72 19.00
(a) What is the level of price, output, and amount of profit for an unregulated monopolist?
(b) Using the data in the table, what is the price, output, and profit for a regulated monopolist that sets price equal to marginal cost compared with an unregulated monopolist?
(c) Using the data in the table, what is the price, output, and profit for a regulated monopolist that charges a “fair-return” price compared with an unregulated monopolist?
(d)Analyze the effect of regulation on the allocation of resources. Which situation is most efficient? Which situation is most likely to be chosen by government? Why?
(a) The unregulated monopolist will charge a price of $23.00, produce 4 units, and make a profit
In the table below are cost and demand data for a pure monopolist. Quantity Marginal Average Marginal demanded Price revenue cost cost 0 $35.00 1 32.00 $ 32.00 $48.00 $48.00 2 29.00 26.00 30.00 12.00 3 26.00 20.00 23.34 10.00 4 23.00 14.00 21.00 14.00 5 20.00 8.00 20.00 16.00 6 17.00 2.00 19.50 17.00 7 14.00 –4.00 19.28 18.00 8 11.00 –10.00 18.68 18.50 9 8.00 –16.00 18.72 19.00 (a) What is the level of price, output, and amount of profit for an unregulated monopolist? (b) Using the data in the table, what is the price, output, and profit for a regulated monopolist that sets price equal to marginal cost compared with an unregulated monopolist? (c) Using the data in the table, what is the price, output, and profit for a regulated monopolist that charges a “fair-return” price compared with an unregulated monopolist? (d) Analyze the effect of regulation on the allocation of resources. Which situation is most efficient? Which situation is most likely to be chosen by government? Why? (a) The unregulated monopolist will charge a price of $23.00, produce 4 units, and make a profit
Explanation / Answer
Following is the given table -
(a) An unregulated monopolist will produce that level of output at which marginal cost equals marginal revenue to maximzie profit.
Above table shows that, MR equals MC when 4 units are produced.
Price corresponding to 4 units = $23
Average cost corresponding to 4 units = $21
Profit = (Price * Units produced) - (Average cost * Units produced)
Profit = ($23 * 4) - ($21 * 4)
Profit = $8
So, for an unregulated monopolist,
Price = $23 per unit
Output = 4 units
Profit = $8
(b) If monopolist is regulated and sets price equal to marginal cost then it will produce 6 units as at 6 units, price equals marginal cost.
Price corresponding to 6 units = $17
Average cost corresponding to 6 units = $19.50
Profit = (Price * Units produced) - (Average cost * Units produced)
Profit = ($17 * 6) - ($19.50 * 6)
Profit = -$15
So, for a regulated monopolist that set price equal to marginal cost,
Price = $17 per unit
Output = 6 units
Profit = -$15
(c) If monopolist is regulated in terms that it charges a 'fair-return' price then it will produce that level of output at which price equals average cost.
Price equals average cost when 5 units are produced. So, monopolist charging 'fair-return' price then it will produce 5 units.
Price corresponding to 5 units = $20
Average cost corresponding to 5 units = $20
Profit = (Price * Units produced) - (Average cost * Units produced)
Profit = ($20 * 5) - ($20 * 5)
Profit = $0
So, for a regulated monopolist that charges a 'fair-return' price,
Price = $20 per unit
Output = 5 units
Profit = $0
(d) Production is said to be most efficient when production outcome is such that it mirrors production under perfect competition.
Under perfect competition, a firm produce that level of output at which price equals marginal cost.
Thus, when monopolist is regulated and produce output at which price equals marginal cost then situation is most efficient as it mirrors production under perfect competition.
It can be seen that when monopolist is regulated using marginal cost pricing method (Price equals marginal cost) then it results in loss. This will prompt the monopolist to discontinue production.
So, the situation most likely to be chosen by government will be the regulation of monopolist using 'fair-return' price system because using this method will not only result in price being lower than unregulated monopolist but also accruing of normal profit for monopolist as well inducing him to remian operating.
Quantity demanded Price Marginal cost Marginal revenue Average cost 0 $35 - - - 1 32 $48 $32 $48 2 29 12 26 30 3 26 10 20 23.34 4 23 14 14 21 5 20 16 8 20 6 17 17 2 19.50 7 14 18 -4 19.28 8 11 18.50 -10 18.68 9 8 19 -16 18.72