Assume that you are an industry consultant. You are called in to consult on two
ID: 1221230 • Letter: A
Question
Assume that you are an industry consultant. You are called in to consult on two different international analyses. For each of the story examples below, show all your calculations very carefully
Story 1
Begin your analysis by finding a benchmark socially efficient level of output. Then compare the competitive industry level of output with the monopolistic level of output. Show all your calculations.
The industry is in Cambodia. Your initial assessment shows that the general inverse demand function for the market is P = 400-8Q. Further analysis has indicated that the external marginal cost is 7Q. The internal marginal cost is twice the external cost.
Story 2
Begin your analysis by finding a benchmark socially efficient price and level of output. Then calculate the monopolistic price and level of output. Finally calculate the threshold dollar amount that the monopolist should budget for lobbying to bar price regulation to take prices to the socially optimal level. Show all your calculations.
The industry is in Bosnia. It is a monopolistic industry. Your initial assessment shows that the general inverse demand function is P = 80-4Q. Further analysis has indicated that the cost function is C(Q) = 16Q.
Explanation / Answer
(1)
P = 400 - 8Q
External marginal cost (MEC) = 7Q
Internal marginal cost (MC) = 2 x MEC = 2 x 7Q = 14Q
Social marginal cost (SMC) = MEC + MC = 7Q + 14Q = 21Q
Socially efficient output is obtained by equating marginal revenue (MR) with SMC.
Total revenue, TR = P x Q = 400Q - 8Q2
MR = dTR / dQ = 400 - 16Q
Equating with SMC,
400 - 16Q = 21Q
400 = 37Q
Q = 10.81
However, a monopoly outcome is obtained by equating MR with MC:
400 - 16Q = 14Q
30Q = 400
Q = 13.33
Finally, a perfectly competitive output is obtained by equating Price with MC:
400 - 8Q = 14Q
22Q = 400
Q = 18.18
Therefore,
Perfectly competitive output > Monopoly output > Socially efficient output.
Note: First question is answered.