Question

1. Assume the government regulates a monopoly by implementing an effective price ceiling (2 pts.)
   1. Name two benefits that arise from this regulation
2. 2. How does an effective price ceiling on a good sold by a monopoly differ from an effective price ceiling in a perfectly competitively market?

Answer 1

a) If price ceiling is effective, then it must be set at a price that is below the monopoly price which is determined using MR = MC rule. At this price, the monopoly is forced to sell more units at a now lower price. Hence one one side consumers are getting units at a lower price and on the other, more units are available to them

b) In a competitive market, price is equal to marginal cost. This price is set by the market forces. Now a price ceiling in competitive market raises quantity demanded and reduces quantity supplied implying that there will be a shortage of good. Hence price ceiling in competitive market causes a shortage while in a monopoly it raises the production.