Answered: The monopolist has a linear marginal…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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There are 5 subparts to this Questionn. please consider a market served by a monopolist. The monopolist has a linear marginal cost (shown here as Marginal Private Cost, MPC_M) and a downward-sloping demand curve D₀. Here is a graphical representation of that market. See attached image for graph.

1) As noted in the introduction for Questions 1 through 5, the market is served by a monopolist. Assume that this monopolist is making a positive economic profit.

Add any necessary curve(s) to the graph shown above and graphically indicate:

The original monopoly price P₀ and monopoly quantity Q₀.
The “socially optimal” output (the output the Benevolent Dictator would choose) Q_SO.
The resulting Consumer Surplus CS₀, the resulting Producer Surplus PS₀, and the size of Dead-Weight Loss DWL₀ if there is such a loss.
Positive economic profits π₀. (Note that here we asking you to graphically depict the total profits earned by the monopolist and not just the profits earned per unit sold. You may have to add an additional curve in order to graphically show economic profits on this graph.)

2) As it relates to your graph from Question 1, please explain in a narrative response of:

How you determined the monopolist output level Q₀ and price P₀, the socially optimal output level Q_SO, and the presence (or absence) of dead-weight loss DWL₀ in this situation. Please incorporate in your explanation a statement explaining which, if any, cost or revenue curves you had to add to the graph to make this determination and why; and make sure that you explain whether the monopolist produces more, less, or exactly the same as the socially optimally output.
How you determined the size of the monopoly profits and why your graphical depiction of profits represents the total economic profits π₀ earned by the monopolist. Please incorporate in your explanation a statement explaining which, if any, cost or revenue curves you had to add to the graph to make this determination and why.

3) Now suppose that this product has a significant negative externality. As a result of the negative externality, for every given output level Marginal Social Cost (MSC) is now higher than Marginal Private Cost (MPC) and is represented by MSC₁, as shown below. Keep in mind that the setting is still that of a monopoly. Figure 2 with MSC1 line added attached as an image.

Please indicate on the graph above, assuming an absence of any government intervention to correct the negative externality and adding any necessary curve(s):

The monopoly price P₁ and the monopoly quantity Q₁ under the condition of the (uncorrected) negative externality. (Also indicate, for comparison purposes, the original monopoly price P₀ and monopoly quantity Q₀.)
The Socially Optimal output, Q_SO1.
The resulting Consumer Surplus CS₁, the resulting Producer Surplus PS₁, and the size of Dead-Weight Loss DWL₁ if there is such a loss.
(No need to show the economic profits earned by the monopolist and/or to add any curves necessary to graphically show such profits).

4) As it relates to your graph from Question 3, please explain in a narrative response of approximately two paragraphs (total):

How you determined the monopolist output level Q₁ and price P₁ when a negative externality was present. How do they compare to Q₀ and price P₀ you found in Questions 1 and 2 in the absence of a negative externality (smaller, larger, the same) and why?
How you determined the socially optimal output level Q_SO1 when a negative externality was present. How does Q_SO1 compare to the Q_SO you found in Questions 1 and 2 in the absence of a negative externality (smaller, larger, the same) and why? How does Q_SO1 compare to the Q₁ (monopolist’s output) you found in Questions 3 and 4 (smaller, larger, the same) and why?

5) In this question, you will discuss the general case of negative externalities and an interesting outcome of a monopolist’s presence in a market with a negative externality.

In the case that you’ve illustrated in Questions 1 and 2, what was the impact of a monopolist’s presence on a market without negative externalities? Did the monopolist hurt the overall social gain (i.e., total surplus or total welfare)? Please explain. (Suggested length: One paragraph).
In the case that you’ve illustrated in Questions 3 and 4, what was the impact of a monopolist’s presence on a market with negative externalities? Could a monopolist improve the competitive market outcome for a good or a service with negative externalities (and no government intervention to correct it)? Why or why not? Please explain. (Suggested length: One to two paragraphs).

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