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# Page 28 of 33 prep101 wwwprep101comfreestuff use the

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Unformatted text preview: uff Use the following figure of a natural monopoly to answer question 46: Price (\$) 15 12 ATC (inflated ) 10 9 ATC 6 MC 3 MR 10 20 30 D 40 Quantity Q46. If the regulator is able to correctly assess the monopoly’s average total cost curve, the deadweight loss arising from rate of return regulation is a) b) c) d) e) \$60 \$40 \$30 \$15 \$0 Solution: d) \$15 Rate of return regulation P=ATC Q=30 and P = 9 Compared to the efficient outcome at Q= 40, deadweight loss arises equal to (1/2)*(9-6)*(40-30) = \$15 Page 29 of 33 ©Prep101 www.prep101.com/freestuff Use the following figure of a Crown Corporation to answer question 47: Price (\$) 24 20 16 ATC (inflated) 12 ATC 8 MC 4 D 10 20 30 40 50 Quantity Q47. Suppose a budget maximizing Crown Corporation that obeys the marginal cost pricing rule inflates its costs so that ATC (inflated) equals \$17. How much output will be produced? a) b) c) d) e) 40 30 20 10 0 Solution: e) 0 units Total subsidy cannot exceed total consumer surplus. In this example, total consumer surplus = (1/2)*(24 – 8...
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