MICROECONOMICS W/CONNECT >IC<
20th Edition
ISBN: 9781259890031
Author: McConnell
Publisher: MCG
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Chapter 19, Problem 3RQ
To determine
What happened to natural monopoly when government regulates it.
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6. The accompanying diagram shows the demand, marginal revenue, and marginal cost of a monopolist. (LO1, LO3, LO5)
a. Determine the profit-maximizing output and price.
b. What price and output would prevail if this firm’s product were sold by price-taking
firms in a perfectly competitive market?
c. Calculate the deadweight loss of this monopoly.
8. The elasticity of demand for a firm’s product is –2.5 and its advertising elasticity of demand is 0.2. (LO8)
a. Determine the firm’s optimal advertising-to-sales ratio.
b. If the firm’s revenues are $40,000, what is its profit-maximizing level of advertising?
Use the accompanying graph to answer the questions that follow. (LO1, LO2) a. Suppose this monopolist is unregulated. (1) What price will the firm charge to maximize its profits? (2) What is the level of consumer surplus at this price? b. Suppose the firm’s price is regulated at $80. (1) What is the firm’s marginal revenue if it produces 7 units? (2) If the firm is able to cover its variable costs at the regulated price, how much output will the firm produce in the short run to maximize its profits? (3) In the long run, how much output will this firm produce if the price remains regulated at $80?
As the manager of a monopoly, you face potential government regulation. Your inversedemand is P = 40 − 2Q, and your costs are C(Q) = 8Q. (LO1, LO2, LO6)a. Determine the monopoly price and output.
Chapter 19 Solutions
MICROECONOMICS W/CONNECT >IC<
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- 1.Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case, justify your classification. LO1arrow_forwardIn view of the problems involved in regulating natural monopolies, compare socially optimal (marginal-cost) pricing and fair-return pricing by referring again to Figure 12.9. Assuming that a government subsidy might be used to cover any loss resulting from marginal-cost pricing, which pricing policy would you favor? Why? What problems might such a subsidy entail?arrow_forwardQuestion 1.Assume there are only two art auction companies who account for 100% of all the sales of 19thCentury impressionist master work paintings in the world. Assume that each company buys thiskind of painting and then resells the paintings at monthly auctions. Ignoring the question of anylaws that might apply, describe what economic arrangement would maximize the twocompanies’ total profits? Show with supply and demand curves what profit they would makefrom this arrangement and what societal welfare loss, if any, results from it.arrow_forward
- Question 3 A firm may be deemed a monopolist, even though it is not the only seller in a market, because what matters is size in relation to the market. True 5 pts O Falsearrow_forwardLet the demand and cost curves for a monopolist be If the government imposes a price ceiling of $100 on the monopolist's price, what is the profit earned by the monopolist without and with the price ceiling? O No ceiling: $10,000 Ceiling: $0 O No ceiling: $10,000 Ceiling: $10,000 O No ceiling: $20,000 Ceiling: $10,000 Q = 1000 - 4P 20000 + 50Q TC O No ceiling: $20,000 Ceiling: $0arrow_forward11 21. Imagine an N firm oligopoly for "nominally differentiated" goods. That is, each of the N firms produces a product that "looks" different from the products of its competitors, but that "really" isn't any different. However, each firm is able to fool some of the buying public. Specifically, each of the N firms (which are identical and have zero marginal cost of production) has a captive market -consumers who will buy only from that firm. The demand generated by each of these captive markets is given by the demand function Pn A- Xn , where Xn is the amount supplied to this captive market and Pn is the price of the production of firm n. There is also a group of intelligent consumers who realize that the products are really undifferentiated. These…arrow_forward
- 9. Suppose that the downstream market for widgets is characterized by the inverse demand curve P = 100 - Q. Widget retailer is controlled by the monopolist WR Inc., which obtains its widgets from the monopoly wholesaler WW Inc. at a wholesale price of ww per widget, WW inc. obtains the widgets in turn from the monopoly manufacturer WM ltd. at a manufacturing price of wm per widget. WM Inc. incurs marginal costs of $10 per unit in making widgets. WW and WR each incur marginal costs of $5 in addition to the prices that they have to pay for widgets. What is the equilibrium widget price to consumers, P, the equilibrium wholesale price ww and the equilibrium manufacturing price wm? What is the profit earned by each firm at these prices? Show that vertical integration by any two of these firms increases profit and benefits consumers. Show that integration of all three firms is even more beneficial.arrow_forward7) Without regulation, an industry that is a natural monopoly will tend to have:a. higher prices than is efficient, especially if demand is elastic.b. higher prices than is efficient, especially if demand is inelastic.C. higher consumpton than is efficient, especially if demand is elastic.d. higher consumption than is efficient, especially if demand is inelastic.arrow_forwardFigure: Maximum Willingness to Pay P $100 75 45 100 100 110 125 2 125 MR MC What is the profit-maximizing quantity for this monopolist? O 110 75 Darrow_forward
- 4. Suppose this market has a single monopoly seller facing the entire market demand Q= 120 – 2P and cost curve C(Q)= 10Q. Now, Suppose the government imposes a unit tax of 4. a) What is the ad valorem tax which will generate the same quantity distortion? b) What is the tax revenue from the ad valorem tax calculated in part a? c) If the government’s objective is to reduce deadweight loss, should they implement a tax? d) If the government is going to implement either a unit tax of 4 or the ad valorem tax you calculated in part a., which one should they chose for the highest tax revenue?arrow_forward. Can we consider WAPDA a government-created/state monopoly? Was creatingWAPDA bad public policy? Explain.ii. Why is marginal revenue less than the price for monopolies? Can marginal revenueever be negative? Explain.iii. Show the deadweight loss from unregulated monopoly. Explain your answer as itrelates to WAPDA.iv. Describe in detail the Public Policy measures that the government can use to managegovernment-created/state monopolies like WAPDA.arrow_forward6) Why has global oil and gas consumption increased in recent decades, despitediscounting?a. Human population has increased.b. Exploration has made new reserves available.C.People have become richer, which has increased demand for oil and gas.d. Only a and c are correct.e. All of the above (a, b, and c) are correct.7) Without regulation, an industry that is a natural monopoly will tend to have:a. higher prices than is efficient, especially if demand is elastic.b. higher prices than is efficient, especially if demand is inelastic.C. higher consumpton than is efficient, especially if demand is elastic.d. higher consumption than is efficient, especially if demand is inelastic.arrow_forward
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