Question

Suppose a monopoly produces products that exhibit negative externalities. The marginal private benefit associated with a monopoly’s consumption is MPB = 360-4Q and the marginal revenue associated with its production is MR = 360-8Q The marginal private cost associated with its production is MPC = 6Q The marginal external cost associated with its production is MEC = 2Q Please draw all the above in one graph and answer the following questions: (1). Find the social optimum (Q* and P*) (5 points) (2). Without any government intervention, the monopoly will product at which point in your graph? Compute the associated price and quantities (Q1 and P1) (5 points)

Answer 1

a) Q* = 30

P* = 240

b) Q1 = 25.71 = (360/14)

P1 = 257.14 = (1800/7)