In this problem, the inverse demand function is 100 – Q, and marginal cost is 90 – Q/2.  A monopolist dominates this Internet industry.  The government orders the firm to produce at the point where the price equals marginal cost.             (a) Why might the government think that this level of output would increase economic efficiency?

Micro Economics For Today
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Chapter13: Antitrust And Regulation
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 In this problem, the inverse demand function is 100 – Q, and marginal cost is 90 – Q/2.  A monopolist dominates this Internet industry.  The government orders the firm to produce at the point where the price equals marginal cost.

            (a) Why might the government think that this level of output would increase economic efficiency?

            (b) Now calculate the output level at which price equals average cost, and calculate profit. Why might the monopolist prefer this output level to the one in which price equals marginal cost?

            (c) How can the government induce the monopoly to produce, for years to come, at the point where price equals marginal cost?

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