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Unformatted text preview: niversity of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Case B emerges if the price at capacity exceeds the marginal cost at capacity. In this case the monopolist will produce at
capacity. By contradiction, Case A occurs whenever ( )
( ) or alternatively when the output where
See graphs below for examples (for convenience we show linear demand and constant returns): Regulated
Monopolist Demand Demand ⏟ ⏟ Notice that the regulator has specified the quantity: the “regulated” output is identical to the “unregulated” output.
What about the “regulated” price? It can be any price between
Monopolist Regulation price can
be anywhere here Demand Demand ⏟ ⏟ 63
ECO 204 Chapter 16: Analysis of Firms with Market Power (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Regardless of which price the regulator chooses, the total social welfare will be the same, albeit with consumers and
producers getting different shares of the welfare pie. For example: Example 1
Monopolist Example 2
Monopolist Demand Demand ⏟ ⏟ Notice that as the regulated price app...
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