Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 21, Problem 5RQ
To determine
Whether the statement about the marginal benefit and cost is true or false.
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Suppose that a monopolist faces linear demand given by Q(p)=1000-10p
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1. Recall the regulation model where legislators apply regulations to garner votes. Votes are a function of producer utility (UR ) and consumer utility (UC ). The legislator’s vote/utility function is V = V(UR , UC ). If U R = R, and U C = K – R – L, where K is a constant and R and L are the typical monopoly versus competitive market outcome below.
Obviously, both U R and U C are affected by the eventual price (P) set by the legislator because both R and L are affected by that price.
(a) Now suppose the demand equation is given by P = 100 - Q , and MC = $20. Write R as a function of the price and show that the price that maximizes producer utility is $60.
(b) Given the MC and demand equation above, find the maximum possible consumer surplus (hint: this will be when the market is competitive).
(c) Now suppose that (in addition to the information in parts d and e), the legislator gets votes according to V (U R, U C ) = 3U R + U C . Find the price that maximizes the legislator’s votes.
Chapter 21 Solutions
Economics (Irwin Economics)
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- The figure below shows the total cost and total revenue curves for a monopolist. The profit - maximizing output for the monopolist is 1 unit 2 units 3 units 4 units 5 units The figure below shows the total cost and total revenue curves for a monopolist. The profit-maximizing output for the monopolist is $100 90 80 70 60 50 40 30 20 10 1 unit 0 1 2 3 4 5 6 7 8 9 2 units 3 units O4 units. TR 5 units Q/tarrow_forwardUse the following information to answer Questions 14 – 18. Consider an industry of 2 firms with the following marginal abatement cost functions: MAC1 = 300 – 30e1 MAC2 = 500 – 20e2 [14] What is the aggregate level of emissions without regulation? [15] How much should a regulator allow each firm to emit to limit aggregate emissions to 20 tons cost-effectively? Firm 1 _____ Firm 2 ________ [16] What tax should the regulator set to achieve an aggregate emissions level of 20? [17] Calculate the total abatement cost for both firms of reaching the aggregate emissions level of 20 tons via the tax? Don’t include the tax payments. Firm 1’s Total Abatement Cost _______________ Firm 2’s Total Abatement Cost _______________ [18] Suppose you want to limit aggregate emissions to 20 tons with a competitive tradeable emissions permit system. If Firm 1 is given 5 permits and Firm 2 is given 15 permits, after trading how many permits will each firm end up with? Firm 1 _________ Firm 2 __________arrow_forwardThe diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2. Dollars 60 50 40 30 20 10 0 Firm 1 FIGURE 17-5 MC₁ li lz ls ls ls lo l Abatement Dollars 60 50 40 30 20 10 0 Firm 2 MC₂ li z ls ls ls Q6 Q7 Abatement Refer to Figure 17-5. Suppose Firm 1 and Firm 2 are each abating Q3 units of pollution. If the government imposed an emissions tax of $40 per unit of emissions, OA) each firm would abate to the same level. B) Firm 2 would increase abatement beyond Q3 and Firm 1 would abate less than Q3. C) each firm would abate to Q3. D) the level of pollution would be optimal. E) Firm 1 would increase abatement beyond Q3 and Firm 2 would abate less than Q3.arrow_forward
- A drug company produces a new drug to treat baldness. The inverse demand curve for the drug is P = 205 - 200, where Q measures the number of pills in millions. The various costs of production are given by TC = 100 +5Q, ATC = 5 + 100/Q, and MC = 5. If the government grants this firm a patent, it will earn profits of ___________. If the government revokes the patent, and the firm must sell its drug at marginal cost because of competition, it will earn profits or losses of $600 million; $500,000 $70 million; -$25 million $2 billion; $0 $400 million; -$100 millionarrow_forwardThe table below shows demand and cost information for a natural monopoly. Use the information in the table to answer the questions below: Price in $ Quantity Total Revenue in $ Marginal Revenue in $ Marginal Cost in $ Average Total Cost in $ -- 200 195 195 165 185 195 1 185 155 170 190 380 175 160 167 185 3 555 165 166 180 4 720 165 175 168 875 155 175 205 170 1020 145 170 245 184 1155 135 165 7 305 199 1280 125 160 8 Assuming no government intervention in this market; what would be the equilibrium price? 24 If the government decided to regulate and set the price equal to average cost; the new price would be: 24 In general, this type of regulation tends to cause the monopoly output toarrow_forward16-5. Your pharmaceutical firm is seeking to open up new international markets by partnering with various distributors. The different distribution within a country are stronger with different market segments (hospitals, retail pharmacies, etc.) but also have substantial overlap. A. In Egypt, you calculate that the annual value created by one distributor is $60 millions per year, but would be $80 millions if two distributors carried your product line. How much of the value can you expect to capture? B. Argentina also has two distributors with values similar to those in Egypt, but both are run by the government. How does this affect the amount you could capture? C. In Argentina a, if you do not reach an agreement with the government distributors, you can set up a less efficient Internet-based distribution system that would generate $20 million in value to you. How does tis affect the amount you could capture?arrow_forward
- E2.......2arrow_forward14. Suppose that the market for a certain good has an inverse demand of P = 200 – Q. The aggregate private marginal cost for the firms that produce the good is MC = 20 + Q. However, production of the good also creates pollution with a external marginal cost of EMC = 10 + 2Q. e. If this is a perfectly competitive market with no regulation, what is the equilibrium price and quantity produced? f. Suppose instead that the market is a monopoly. Calculate the profit- maximizing price and quantity. g. Determine the socially efficient price and quantity for the good. h. Calculate the socially optimal per-unit tax to levy on the competitive firms and the monopolist respectively to make them produce at the socially efficient level.arrow_forwardQUESTION 18 Consider a monopoly, where the demand curve is given by P = 100-Q, marginal revenue is given by MR = 100-20, total cost is given by TC=10+20, and marginal cost is given by MC = 10. Solve for the monopolist's profit. O 2375 O -2375 O 2462 O -2462arrow_forward
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