Economic Written Report
AF2601
Introduction to Economic
Written Report
6.1 a) Consider a monopoly facing the following demand and MC curves:
Demand: P = 12 – 0.002 Q
MC: MC = 3 + 0.001 Q
(i) Calculate the profit maximizing output of this monopoly.
Ans: The output level of monopoly to maximize profit is MR=MC.
As, P=a-bQ, the MR curve will be MR=a-2bQ,
So, 12-2(0.002Q) = 3+0.001Q
12-0.004Q = 3+0.001Q 9 = 0.005Q Q = 1800 Monopoly Price = 12-0.002(1800) = $8.4
(ii) Calculate the socially efficient output level.
Ans: Socially efficient level : Market demand=P=MC 12-0.002Q = 3+0.001Q 9 = 0.003Q Q = 3000 Social Market Price = 12-0.002(3000) = $6
(iii) Suppose the government wants to adopt a price ceiling to induce this monopoly to produce at the socially efficient output level. Explain what the level of price ceiling should be.
(Note: When the demand curve is P = a – b Q, the MR curve will be MR = a – 2 b Q.)
Ans: An effective price ceiling should be less than the monopoly market price which is $8.4
As we mentioned before, when the monopoly produces 3000 units, which is the socially efficient output level, the social market price is 12-0.002(3000) = $6.
Therefore, if the government wants to adopt a price ceiling to induce this monopoly to produce at the socially efficient output level, the level of price ceiling should be set at $6.
6.1 b) Suppose a monopoly produces and sells a product which incurs external costs during the production process. Discuss whether it is possible for this firm to reach allocative efficiency in the absence of government intervention.
Ans:
This diagram shows the pricing and output level of a monopoly. The allocative efficient output level and price is that when MC=D=P , which is Qe and Pe. However, a monopoly will set the output level at the
Introduction to Economic
Written Report
6.1 a) Consider a monopoly facing the following demand and MC curves:
Demand: P = 12 – 0.002 Q
MC: MC = 3 + 0.001 Q
(i) Calculate the profit maximizing output of this monopoly.
Ans: The output level of monopoly to maximize profit is MR=MC.
As, P=a-bQ, the MR curve will be MR=a-2bQ,
So, 12-2(0.002Q) = 3+0.001Q
12-0.004Q = 3+0.001Q 9 = 0.005Q Q = 1800 Monopoly Price = 12-0.002(1800) = $8.4
(ii) Calculate the socially efficient output level.
Ans: Socially efficient level : Market demand=P=MC 12-0.002Q = 3+0.001Q 9 = 0.003Q Q = 3000 Social Market Price = 12-0.002(3000) = $6
(iii) Suppose the government wants to adopt a price ceiling to induce this monopoly to produce at the socially efficient output level. Explain what the level of price ceiling should be.
(Note: When the demand curve is P = a – b Q, the MR curve will be MR = a – 2 b Q.)
Ans: An effective price ceiling should be less than the monopoly market price which is $8.4
As we mentioned before, when the monopoly produces 3000 units, which is the socially efficient output level, the social market price is 12-0.002(3000) = $6.
Therefore, if the government wants to adopt a price ceiling to induce this monopoly to produce at the socially efficient output level, the level of price ceiling should be set at $6.
6.1 b) Suppose a monopoly produces and sells a product which incurs external costs during the production process. Discuss whether it is possible for this firm to reach allocative efficiency in the absence of government intervention.
Ans:
This diagram shows the pricing and output level of a monopoly. The allocative efficient output level and price is that when MC=D=P , which is Qe and Pe. However, a monopoly will set the output level at the