Microeconomics (7th Edition)
Microeconomics (7th Edition)
7th Edition
ISBN: 9780134737508
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 15, Problem 15.2.7PA
To determine

The relevance of copyright.

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The three graphs below illustrate the market for electricity. The distribution of electricity is a natural monopoly; therefore, to take advantage of lower production costs, it is efficient to have only one firm in the market. Unfortunately, if a monopoly were allowed to provide electricity, it would charge a higher price and provide a smaller amount of electricity than would be desirable. In other words, the unregulated monopoly would charge the monopoly's profit-maximizing price. To avoid this, the government will allow a single firm to provide electricity, but the government will regulate the price. Let’s compare possible regulatory solutions.
DeBeers has a monopoly on the production of diamonds. Use the following graph showing the demand, MR and cost curves of DeBeers to answer the questions below. How many carats of diamonds does DeBeers produce to maximize its annual profit? What price does it charge? How much annual profit does it make? If DeBeers was producing at the allocatively efficient level of output, how many carats of diamonds would it produce? What price would it charge? Suppose that the government decided to regulate DeBeers monopoly and imposes a price ceiling of $50 per carat of diamonds. How many carats of diamonds would DeBeers produce? What price would it charge? What profit would it make?
You have a dream job at The Zen Hotel, which has a monopoly in an area of Blue Rock State Park, protected by a historic license. There’s all-day access for employees to recreational facilities, and even the breakfast buffet is free! One the other side of the park, the Nirvana Lodge also holds a solitary license, and the owners have engaged in talks to merge the two properties under one company. As you return from a dip in the infinity pool, the manager treats you to coffee and desserts. “We’re going through with this merger thing, and we have to upload next year’s prices to the booking website. We don’t want one of the hotels to look ‘cheap,’ so we’ll keep charging the same price for both. But we were thinking of going a bit more premium, now that we run both.” At present, the Zen and Nirvana both sell at $480 per night per room. You have access to some reports by recently hired consultants. They found that the Zen Hotel enjoys a market demand of qZ = 2,800 - 10P/3, where qZ is annual…
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