Consider a situation where a monopolist faces the foloowing inverse demand curve
ID: 1227660 • Letter: C
Question
Consider a situation where a monopolist faces the foloowing inverse demand curve, p = 240 - 2q and constant marginal costs of MC = 40. Suppose that a regulator imposed a price ceiling on the monopolist of p = MC = 40.
- Suppose the regulator was susceptible to a bribe. For $500, the regulator will "make a mistake" in calculating the price ceiling for the monopolist, causting the price ceiling to be p = MC + 20 = 60. Would this bribe be worth it for the monopolist? Why or why not?
- 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
P = 40
40= 240-2Q
-2Q= -200
Q= 100
60=240-2Q
60-240/2= Q
Q= 90
Here we have to see what is the revenue from both of these
1) 100*40 = 4000
2) 90*60 = 5400
Substract the bribe costs that will be 5400-500 = 4900
Still 400 is more revenue you make
Yes it is worth it
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Next 80=240-2Q =
Revenue 6400-1000 bribe is 5400 which is 1400 higher than initial
Next 100=240-2Q
Q = 60, Revenue is 6000 with 1500 bribe so total is 4500
So the monopolist is better off paying just 1000