A monopoly can use one of two alternative technologies. One technology requires 10 units of capital and 11 units of labor for each unit of output. The other technology requires 20 units of capital and 2 units of labor for each unit of output. The price of capital, r, and labor, w are both $1 per time period. This means the cost function cor- responding to the first technology is C1(y) = 2ly and the cost function corresponding to the second technology is C2(y) = 22y. The demand function is given by: P(y) = 100 - y The unregulated monopolist will clearly use the first technology since it allows produc- tion of any output level y at a lower cost (a) Calculate the monopoly's output, price, and profit if it uses the first technology. Consider a rate of return regulation which allows the monopoly to take as profit only $0.1 per each $1 of capital. (b) What would be the output, price and profit under each technology?

A monopoly can use one of two alternative technologies. One technology requires 10 units of capital and 11 units of labor for each unit of output. The other technology requires 20 units of capital and 2 units of labor for each unit of output. The price of capital, r, and labor, w are both $1 per time period. This means the cost function cor- responding to the first technology is C1(y) = 2ly and the cost function corresponding to the second technology is C2(y) = 22y. The demand function is given by: P(y) = 100 - y The unregulated monopolist will clearly use the first technology since it allows produc- tion of any output level y at a lower cost (a) Calculate the monopoly's output, price, and profit if it uses the first technology. Consider a rate of return regulation which allows the monopoly to take as profit only $0.1 per each $1 of capital. (b) What would be the output, price and profit under each technology?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter14: Monopoly

Section: Chapter Questions

Problem 14.9P

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