SectionWS14

SectionWS14 - P d q = 28 0008 q where q is the number of...

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Econ 100A - Worksheet #14 Monopoly Exercise 1 Jeremy has a monopoly on jetsky rental on Peterson Lake. After observation of past behavior of consumers in a market where it holds a monopoly, a ﬁrm possesses the following information about the demand function, shown in table 1. After ﬁlling in the empty cells of this table, what price would you suggest Jeremy sets, knowing that the marginal cost is \$50? What would be the quantity produced, Jeremy’s proﬁt and the consumer surplus? q p R(q) MR 27 66.5 × 28 66 29 65.5 30 65 31 64.5 Table 1: Exercise 2 (Regulation of a Monopoly) 1) A preliminary question Consider the following cost function: C ( q ) = cq 2 + F, c, F > 0 . Show that the average cost is decreasing if and only if q < q F c . 2) John Gardner is the city planner in a medium-sized southern city. The city is considering a proposal to award and exclusive contract to Clear Vision, Inc., a cable television carrier. This investigation prior to the proposal has shown that the inverse demand function for cable services is
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Unformatted text preview: P d ( q ) = 28-. 0008 q, where q is the number of cable subscribers. Moreover Clear Vision, Inc. informs Mr Gardner that its total cost function is TC ( q ) = 0 . 0006 q 2 + 120000 . a) What price and quantity would be expected if the ﬁrm is allowed to operate completely unregulated? What would be the consumer’s surplus and the proﬁt of the ﬁrm? b) Suppose now that an economist suggests to Mr Gardner to regulate the monopoly into setting a price equal to marginal cost. What would be the resulting price and quantity? What would then be the consumer’s surplus, the proﬁt of the ﬁrm and the social surplus? c) What problem does this regulation suggestion poses? Based on the preliminary question and on the nature of good produced here, explain both mathematically and intuitively why this problem exists. d) What would you suggest to solve this problem and what would be the resulting price, quantity and consumer surplus? 1...
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This note was uploaded on 07/09/2010 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at Berkeley.

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