03.08 Regulating Monopolies

03.08 Regulating Monopolies - shown in the blue area below...

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Lesson 03.08 Regulating Monopolies 1a. An electrical monopolist would determine its profit maximizing price and output level by finding the point where MC=MR and go up from that point until the demand curve is reached. That would be the monopoly price. b. Consumer surplus is shown in yellow area on the graph while producer surplus is shown is red area. c. Deadweight loss is shown in the blue area on the graph.
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2a. The electrical monopolist would determine its profit-maximizing price and output level by setting the price to where ATC=D (“Fair Return”, P FR ). However, if the government subsidized the electricity company as well, the price would be set to where MC=D (Socially optimal price, P SC ). b. Consumer surplus (for the “Fair Return” regulation) is shown in the yellow shaded area above P FR and producer surplus (for the “Fair Return” regulation as well) can be
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Unformatted text preview: shown in the blue area below P FR. c. The deadweight loss is shown in the black area. 3a. Assume that before the deregulation, the electricity companies where operating at the socially optimal price (MC=D). Basically, at this price, the companies where operating as if they were in a perfectly competitive market. The deregulation will cause price to rise and output to fall as the companies shift from a perfectly competitive market for electricity production to a monopoly market. As one can see, the Marginal revenue (MR) has fallen lower from the demand curve and the companies become price makers; setting their price to where the point MC=MR meets the demand curve vertically. b. Consumer surplus for the profit maximizing monopoly is shown in the yellow shaded area above P M and producer surplus is shown in the blue shaded area below P M ....
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03.08 Regulating Monopolies - shown in the blue area below...

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