Consider a situation where a monopolist faces the following inverse demand curve
ID: 1227581 • Letter: C
Question
Consider a situation where a monopolist faces the following inverse demand curve p = 240 - 2q and constant marginal costs of MC = 40.
a. Suppose that a regulator imposed a price ceiling on te monopolist of p = MC = 40. What are the equilibrium price, quantity, and profits for this monopolist?
b. Now suppose a regulator was susceptible to a bribe. for $500, the regulator will "make a mistake" in calculating the price ceiling for the monopolist, causing the price ceiling to be p = MC + 20 = 60. Would this bribe be worth it for the monopolist? Why or why not?
c. For every $500 the monopolist gives the regulator, the regulator will raise the price of the price ceiling by $20. How much of a bribe should the monopolist give to the regulator?
Explanation / Answer
a.Inverse demand curve p = 240 - 2q and constant marginal costs of MC = 40.
240-2q=40
Or,2q=200
Or,q=100.
Putting value of q in demand function we have,
p=240-200=40.
Profit=(40*100)-(40*100)=0.
b)When price will increase quantity sold will be decreased.So price rise will be worthless.