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Unformatted text preview: MC.
For first class mail:
Solving for Q:
. /0.04 = 45 billion letters and p = 1.90 – 0.02(45) = $1
For priority mail: . Solving for Q: .
/0.016 = 708.125 million letters and p = 11.43 – 0.008(708.125) = $5.765 B2) The Lerner index (page 364 of Goolsbee et al) gives the optimal markup as On page 408, the Lerner Index is manipulated to show that1 which also implies that ∙ ∙1 ∙ Using this, and noting that MR = MC at the profit maximizing solution, calculate the price elasticity of demand at
the monopolist’s profit-maximizing quantity in each market. Which market has more inelastic demand at profit
. For first class mail:
.∙ → →. → . . For priority mail: . → 1 If we multiply the Lerner index by P and then subtract P from both sides, we have Multiply both sides by gives the form in B2). ∙1 ∙ . . ∙ .∙ →. . → . At the profit maximizing prices/quantities, demand for priority mail is less elastic
B3) Suppose the PRC forced USPS to charge the same lower rate in both markets. What would be the quantity
demanded in each market?
First class is the lower price, so that would remain the same. If USPS charged $1 for priority mail, demand
would increase to 1.3 billion letters.
. . → . B4) How would this price regulation affect USPS’s producer surplus?
Producer surplus in the market for first class letters is unchanged.
In the market for priorty mail, producer surplus without reguation is (5.765-0.1)* 708.125 million
With regulation, producer surplus = $1 – 0.1)*1303.75 million = $1173.375
So it has the effect of reducing producer surplus by $2838.15 Figure for Part A...
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