Consider a small isolated town in which a brewery faces the following inverse

Consider a small isolated town in which a brewery

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17. Consider a small, isolated town in which a brewery faces the following inverse demand: P= 15 0.33QThe brewery can produce beer at a constant marginal and average total cost of $1 per bottle.a. Calculate the profit-maximizing price and quantity, as well as producer and consumer surplus and the deadweight loss from market power.b. If it were possible to organize the townsfolk, how much would they be willing to pay the brewery to sell beer at a price equal to its marginal cost?c. What is the minimum payment the brewery would be willing to accept to sell beer at a price equal to marginal cost?d. Is there potentially a bargain that can be struck between the townsfolk and brewery? What would the deadweight loss be if such a bargain were struck? . Goolsbee1e_Solutions_Manual_Ch09.indd 118 Goolsbee1e_Solutions_Manual_Ch09.indd 118 11/15/12 3:09 PM 11/15/12 3:09 PM
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Market Power and Monopoly Chapter 9 119 Solution 17. Quantity of drugs Price ($/unit) $15 8 1 21.21 45.45 C B A MC = $1 MR D E 0 Q MC $8 : : Q : MC ): Goolsbee1e_Solutions_Manual_Ch09.indd 119 Goolsbee1e_Solutions_Manual_Ch09.indd 119 11/15/12 3:09 PM 11/15/12 3:09 PM
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120 Part 3 Markets and Prices Solution 18. Consider the firm depicted in the diagram below.QuantityPrice($/output)LMCLATC0MRD$251077005001,000a. Is the firm a natural monopoly? How do you know?b. Will this firm earn a profit if it is not subject to regulation? How do you know?c. If the government requires the firm to charge no more than its marginal cost of production, how many units will be sold? At what price? What is the problem with the government capping prices at marginal cost?d. Suppose the government allows firms to charge no more than their average total costs of production. How many units will this firm sell? At what price? What is the problem with capping prices at average total cost?e. Evaluate the deadweight loss under each of the three pricing regimes above. Show each regime’s dead-weight loss as an area on the graph. 18. a. A natural monopoly refers to a situation in which the firm’s long-run average total cost curve is always downward-sloping (exhibits economies of scale) over the relevant levels of output. Such is clearly the case in this diagram, in which LATC is falling over all levels of potential quantities demanded. (
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