Question

Specifically need answers to e, f, and g

Suppose a simple monopoly faces the following demand curve for its product: P = 100 - Q. Suppose the monopolist faces total costs given by: TC = 20Q.

a. Draw the demand curve, the marginal revenue curve, and the marginal cost curve. Make sure to label all axes and intercepts.

b. What are the values for the simple monopoly profit-maximizing price and quantity? Label these on the graph.

c. Consider the consumers' surplus that is associated with the monopolist’s optimal price/quantity combination. Label this consumers' surplus on your graph and calculate its value.

d. Suppose the mayor proposes an executive order to regulate the simple monopoly so that it becomes allocatively efficient. How much would be traded under the proposed regulation? What would consumers' surplus be both graphically and numerically under the proposed regulation?

e. Is the simple monopolist’s original unregulated optimal output level allocatively efficient?

f. If not, please show graphically and compute numerically a value that reflects the dollar loss to society of the inefficiency under the original unregulated simple monopoly solution.

g. Suppose the government is corrupt and the monopolist realizes he can bribe the mayor to stop him from proposing the regulation. Using all the information given above, what is the maximum amount that the monopolist would offer the mayor to "kill" the regulation idea?

Answer 1

E) no monoply outcome is not allocatively efficient

Bcoz at allocative effeciency, P = MC

But in monopoly,

MR = MC

100-2Q = 20

Q* = 40

P* = 100-40 = 60

THUS P > MC , so allocative ineffeciency.

( In perfect competition, P = MC

100-Q = 20

Q* = 80 , P = 20

F) dollar loss to society is deadweight loss

= .5*(80-40)*(60-20)

= .5*40*40

= 800

g) maximum amount is the increase in profit from. Regulatory perfect competition to monopoly.

In regulation, π = 0

Monopoly π = (P-MC)Q

= 40*40

= 1600