Economics (MindTap Course List)
13th Edition
ISBN: 9781337617383
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter 25, Problem 4WNG
To determine
Determine the quantity in the figure that is consistent with profit regulation and price regulation.
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If the government wants to increase the market efficiency through price regulation, would you suggest the government setting the price equal to the firm’s marginal cost or its average total cost? Explain in detail with the diagram in part
Under one form of government price regulation, the government sets the price at a level (which is equal to $20 in the above graph) and the firm then sets MC equal to the regulated price to determine a profit-maximizing quantity at the regulated price.
(a) If the regulated price is $20 per unit, how many units will the regulated monopoly produce?
(b) If the regulated price is $20, how much will consumers want to buy?
(c) Is there a surplus or a shortage or neither at the regulated price? If there is a surplus or shortage,
how much is the surplus or shortage?
(d) At what regulated price would the deadweight loss be zero?
(e) Will the deadweight loss of the monopoly represented in the above graph be larger, smaller or the same at a price of $20 compared to at a price of $200? You do not have to calculate the deadweight loss at either price, you just have to state whether the deadweight loss is larger, smaller or the same at $20 compared to $200.
Use the below graph:
If a regulatory commission establishes a price with the goal of allowing the firm a normal profit, what would be the price and output? What would be the firm’s profit or loss?
Chapter 25 Solutions
Economics (MindTap Course List)
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- Could you also answer the following questions too. If Big Top is regulated to charge a price equal to average total cost, what is the quantity of tickets sold, the price of a ticket, and economic profit? If Big Top is regulated to produce the efficient output, what is the quantity of tickets sold, what is the price of a ticket, and what would be the consumer surplus? Draw a graph to illustrate the circus market if regulators set a price cap that enables Big Top to break even. Show the deadweight loss in your graph.arrow_forwardQ3. Say the town of Manchester has regulated its water utility so that it covers the cost of its production for its water and also adds a 20% profit to the price it charges its customer. What would this regulation example be considered? a.) Price-cap regulation b.) Cost-plus regulation c.) Break-even regulationarrow_forward(1A) Say the government places regulation on a natural monopolist so that for its product it can only set its price so high, e.g. a price ceiling. What is this type of regulation called? Price-cap regulation Cost-plus regulation Breakeven regulation (1B) Which of the following describes the typical shape of the monopolist's total cost curve? (a) Total costs decrease and become flatter as output rises.(b) Total costs are typically constant and are shown by a straight horizontal line.(c) Total costs rise and grow steeper as output rises. (1C) Which of the following statements is true about price discrimination In the United States. (a)Price discrimination is permitted.(b)Price discrimination is illegal.(c)Price discrimination is supported. (1D) In the economy, allocative efficiency takes place (a)when goods and services production is at their lowest costs.(b)when the mix of goods and services is at its ideal or optimal.(c) when deadweight loss of goods and services in an economy…arrow_forward
- The figure below represents the cost and demand curves for a natural monopoly that is regulated using a marginal cost pricing rule. Identify the area in the graph above that represents consumer surplus when the firm is regulated using marginal cost pricing? What would happen to the consumer surplus if the government decide to set a fair return price?arrow_forwardUse the following table to answer the following three questions. Demand: Quantity 1 2 3 4 5 6 7 8 9 10 Price 10 9 8 7 6 5 4 3 2 1 Marginal Revenue 10 8 6 4 2 0 -2 -4 -6 -8 Costs: Marginal Cost 9 6 5 3 2 3 4 5 7 10 Average Cost 9 7.5 6.7 5.8 5 4.7 4.6 4.6 4.9 5.4 If the transit system was allowed to operate as an unregulated monopoly, what output would it supply and what price would it change? If the transit system was regulated to operate with no subsidy ( i.e., at zero economic profit ), what approximate output would it supply and what approximate price would it charge? If the transit system was regulated to provide the most allocatively efficient quantity of output. what output would it supply and what price would it…arrow_forwardThe figure to the right shows the market demand for electricity and the average total cost and marginal cost of producing electricity for a utility company. Suppose the utility company is a regulated natural monopoly. If government regulators want to achieve economic efficiency, then they will regulate a price of $ —— per kilowatt hour. (Enter a numeric response using a real number rounded to two decimal places.)arrow_forward
- Given what you know about regulatory capture, can you describe a possible scenario where accusations of restrictive practices ends up limiting competition, rather than extending it?arrow_forwardFill-up the following table relating to monopoly operations and regulations given the following total cost and inverse demand functions: Total Cost: TC = Q2 + 100;Inverse Demand: P = 120 – Q No regulation MC-Pricing (MC=P*) w/ Lump Sum Tax (T=75) w/ Specific Tax (t=10) Profit Equation Q* P* TR at Q* TC at Q* Profit at Q* Tax Revenue Consumer Surplus Producer Surplus Deadweight loss 2. Choose one type of regulation you analyzed in #1 and graphically illustrate the results.arrow_forwardExplain verbally and graphically how price (rate) regulation may improve the performance of monopolies. In your answer distinguish between (a) socially optimal (marginal cost) pricing and ( b) fair-return (average-total-cost) pricing. What is the “dilemma of regulation”?arrow_forward
- Why are price controls a bad idea for the government to place on pharmaceutical companies? (explain what a price control is and how the government would use it on pharmaceutical company drugs) Using Pharmaceutical Revenues please explain the push supply or pull demand strategies used to increase sales. How can a pharmaceutical company become a monopoly for a product or a drug? What are the benefits for the company and the economy as a whole? What are some of the drawbacks?arrow_forwardHow would you describe the development of the market regulation and the concept of "fair competition" in the market?arrow_forwardMicrosoft Windows 8 to Go on Sale in October. Microsoft announced that its Windows 8 operating system will be released in October 2012, three years after Windows 7 went public. Windows 8 will be available in 109 languages across 231 markets worldwide a. Is Microsoft a natural monopoly or a legal monopoly? b. Does Microsoft price discriminate or do the different prices of Windows reflect cost differences? c. Sketch a demand curve for Windows, Microsoft’s marginal cost curve, and the distribution of the total surplus between consumers and Microsoft.arrow_forward
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