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Unformatted text preview: regulated by the U.S. Postal Regulatory Commission (PRC). What would be the regulated
price that maximizes total surplus?
Set the price at the competitive level where P= MC = 12.3, the competitive market solution.
A11) Why might the PRC allow the USPS to charge a price above the marginal cost? Hint: suppose that the
average costs are not constant at all levels but look like either of the two alternatives shown below. How would
high fixed costs affect the shape of the average cost curve and which curve is likely to represent the postal
If a monopoly has high fixed costs as the USPS does, it is possible that the marginal cost cuts the demand
curve at a point below the firm’s long run average costs as shown on the right graph. As a result, the postal
service will make losses and will be forced to exit. The absence of a postal service implies a DWL would be
the total welfare from the competitive market solution, $9.024 billion. Alternative possible cost structures facing the U.S. Postal Regulatory Commission.
Cents Cents MC ATC MC E ATC
12.3 12.3 D D
Billion pieces 58
MR Billion pieces 58
MR 14 Part B.
One of the ways in which USPS practices third degree price discrimitaion is by offering priority mail service, in
which consumers pay higher rates for faster delivery.
1.90 Suppose the inverse demand for first class letters is represented by
billions of letters.
11.43 The inverse demand for priority mailed letters is
letters. 0.02 , where P is dollars and Q is 0.008 , where P is dollars and Q is millions of Imagine the marginal cost for delivering either kind of mail is the same, and constant at 10 cents per letter.
B1) What is the profit maximizing price and quantity for each type of mail if the USPS can practice third degree
USPS will maximize profit in each market by setting MR =...
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