Economics: Principles and Policy (MindTap Course List)
13th Edition
ISBN: 9781305280595
Author: William J. Baumol, Alan S. Blinder
Publisher: Cengage Learning
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Question
Chapter 12, Problem 9DQ
To determine
The effectiveness of market forces to keep the price down.
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Draw a monopolist’s demand curve, marginal revenue, and marginal cost curves. Identify the monopolist’s profit-maximizing output level, let’s call them Q0 and P0. Now, think about a slightly higher level of output (say Q0 + 1). According to the graph, is there any consumer willing to pay more than the marginal cost of that new level of output? If so, what does this mean?
A monopolist sells boat insurance policies linked to their registrations in two states, and resales between the two states is not allowed, as the registrations are in line with the rules set in each state. The demand curves for car insurance policies in the two states are:
P1 = 200 – Q1
P2 = 150 – Q2
The monopoly's marginal cost is $50.
a. Find the equilibrium quantity and price charged in each state.
b. How would change the outcome if the monopolist’s marginal cost increases from $50 to $70 only in the first state for the company being able to discriminate prices between states?
c. What would be the outcome if the government applies a tax of $30 per insurance (unit) to the latest scenario presented in b)?
d. Present a graphical representation of this case study and discuss about the profit maximising output under the different scenarios presented above. Does the government have other alternatives to intervene this market?
Draw a graph with linear demand and marginal curves and a horizontal MC curve. Find the monopolist’s profit-maximizing price (P*) and output (Q*). Now change the demand curve by rotating it clockwise (making it steeper) through the point (Q*, P*). What is the new profit-maximizing price and quantity? Is price higher or lower? Relate your answer to the fact that a monopolist does not have a supply curve
Chapter 12 Solutions
Economics: Principles and Policy (MindTap Course List)
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Similar questions
- If the quantity demanded at a price of $10 is 2,000 and the quantity demanded at a price of $8 is 2,400, what should a price-discriminating monopolist do to maximize profits?arrow_forwardSuppose that a monopolist’s demand curve is P = 9 – 2*Q. Marginal cost is expressed as follows: MC = 0.5*Q. What is the profit-maximizing price (P) the monopoly should set? What would be the output (Q) at that price? What are the current values for the consumer and producer surpluses (CS and PS)? Is it possible to calculate the profit made by the monopolist? If so, how much is it? If not, what other information would be needed to do that? What would be the 2 key options for a government regulator to increase the consumer surplus (CS) and reduce the producer surplus (PS)? Explain briefly the pros and cons of one of the options!arrow_forward
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