In the table below are cost and demand data for a pure monopolist. Quantity Marg
ID: 1248657 • 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
Quantity demanded Price marginal revenue Average cost Marginal 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
1. what are the level of price, output, and amount of profit for an unregulated monopolist?
2. what are the price, output, and profit for a regulated monopolist that sets price equal to marginal cost?
3. what are the price, output, and profit for a regulated monopolist that charges a "fair-return" price?
4. which situation is most efficient? which situation is most likely to be chosen by government ? why?
Explanation / Answer
Don't worry. I'm giving you a real answer. 1) To find where an unregulated monopoly will profit maximize, set MR equal to MC. This happens when quantity = 4. So, Price=23 and Output=4. To find profit, subtract the ATC from price and multiply by the quantity. Profit = (23-21)*4 = $8 2) If we set price equal to marginal cost, we have to produce 6 units because that's where P=MC=17. Price=17. Output=6. Profit= (17-19.5)*6 = -$15. A negative profit (loss) is typical of marginal cost pricing. 3) Fair return price means P=ATC. This happens when the output is 5. Price=20. Output=5. Profit =0. Profit always is zero when P=ATC. 4) The most efficient outcome is marginal cost pricing, which is shown in #2. This, of course, assumes that the firm stays in business and suffers a loss. The government may choose scenario 1 or 3. It may choose scenario 1 because monopolies make large campaign contributions and thus buy elected representatives. So, elected representatives will act in the monopoly's best interest in order to maintain an inflow of campaign contributions. However, it may choose scenario 2 because it is the best outcome for the consumer because the consumer surplus is maximized subject to the firm staying in business. Obviously, if the firm goes out of business, the consumer surplus is zero. Your professor will likely accept either answer given in 4. In regulation, there is a wealth of literature surrounding each of them. The first is called capture theory and deals with political economy. The second the naive model where government acts to maximize welfare subject to non-negative profit.