A monopoly can use one of two alternative technologies. One technology requires 10 units of capital and 11 units of labor for each unit of output. The other technology requires 20 units of capital and 2 units of labor for each unit of output. The price of capital, r, and labor, w are both $1 per time period. This means the cost function cor- responding to the first technology is C1(y) = 2ly and the cost function corresponding to the second technology is C2(y) = 22y. The demand function is given by: P(y) = 100 - y The unregulated monopolist will clearly use the first technology since it allows produc- tion of any output level y at a lower cost (a) Calculate the monopoly's output, price, and profit if it uses the first technology. Consider a rate of return regulation which allows the monopoly to take as profit only $0.1 per each $1 of capital. (b) What would be the output, price and profit under each technology?
A monopoly can use one of two alternative technologies. One technology requires 10 units of capital and 11 units of labor for each unit of output. The other technology requires 20 units of capital and 2 units of labor for each unit of output. The price of capital, r, and labor, w are both $1 per time period. This means the cost function cor- responding to the first technology is C1(y) = 2ly and the cost function corresponding to the second technology is C2(y) = 22y. The demand function is given by: P(y) = 100 - y The unregulated monopolist will clearly use the first technology since it allows produc- tion of any output level y at a lower cost (a) Calculate the monopoly's output, price, and profit if it uses the first technology. Consider a rate of return regulation which allows the monopoly to take as profit only $0.1 per each $1 of capital. (b) What would be the output, price and profit under each technology?
Chapter14: Monopoly
Section: Chapter Questions
Problem 14.9P
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Transcribed Image Text:A monopoly can use one of two alternative technologies. One technology requires 10 units of capital and 11 units of labor for
each unit of output. The other technology requires 20 units of capital and 2 units of labor for each unit of output. The price of
capital, r, and labor, w are both $1 per time period. This means the cost function cor- responding to the first technology is C1(y)
= 2ly and the cost function corresponding to the second technology is C2(y) = 22y. The demand function is given by: P(y) = 100
-y The unregulated monopolist will clearly use the first technology since it allows produc- tion of any output level y at a lower
cost.
%3D
%3D
(a) Calculate the monopoly's output, price, and profit if it uses the first technology Consider a rate of return regulation which
allows the monopoly to take as profit only $0.1 per each $1 of capital.
(b) What would be the output, price and profit under each technology?
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