Question

ONLY NEED C) i and ii and D) i and ii ANSWERED PLEASE

ZD&D holds a patent on a unique medical device that is used for DNA mapping. Assume that ZD&D is a single-price profit-maximizing monopolist and is currently earning positive economic profits.

(a) Draw a correctly labeled graph and show each of the following.

(i) ZD&D’s profit-maximizing price and quantity, labeled as P* and Q*.

(ii) The area representing ZD&D’s economic profits.

(iii) The allocatively efficient level of output, labeled as Qs.

(b) Instead of maximizing profit, assume that now ZD&D maximizes its total revenue.

(i) On your graph in part (a), identify the output level that ZD&D would chose, labeled as Qr.

(ii) Explain why the output you identified maximizes total revenue.

(c) Assume that the government imposes a set price (a price control) on ZD&D so that the allocatively efficient level of output, Qs, is produced.

(i) On your graph in part (a), show this set price, labeled as Ps.

(ii) With the price control, explain whether ZD&D maximizes profit at Qs.

(d) Assume that now the government levies a per-unit tax of $t on ZD&D’s output. Assume that now ZD&D maximizes its profit.

(i) Compared with P* and Q* in part (a), how will ZD&D’s profit-maximizing output and price change?

(ii) Compared with Q* in part (a), does the per-unit tax lead to a more allocatively efficient level of output? Explain.

Answer 1

Ps is labelled in fig 1

No it does not maximise profits at Qs because price is equal to marginal cost whereas marginal revenue is less than marginal cost. Profit maximisation for monopolist requires Mc=mr

D price will rise to p from p* and quantity will fall to Q from Q* in fig 2.note marginal cost has increased by t which leds to this result

ii no it does not led to more allocatively efficient level of output. Such output is Qs in fig 1.Note now price rises(rather than decreasing) and quantity falls( rather than increasing). Thus it does not led to more allocatively efficient level of output