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Demand for waste disposal in some region is given by the formula P = a – bQ (usual notation). The market for waste disposal is purely competitive. The marginal cost for all firms is constant and equal to c. Assume that as a consequence of the issuance of a directive concerning waste disposal, a license for this activity is granted only to one firm. a) How will this influence social welfare (consumer and producer surplus)? b) Find the deadweight loss resulting from the monopoly for the case when demand is given by the formula P = 150 – Q and the marginal cost for each firm is MC = 200q. Assume that initially in the competitive market there were 50 firms and that production possibilities of the monopolist are the same as those of the 50 firms taken togeth

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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

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Related questions

Suppose a monopolist faces a demand curve for its output of P = 300−Q. This means that the marginal revenue curve of the monopolist is M R = 300 − 2Q. Assume that the marginal cost of production is constant and equal to $40.

a) Write down an expression for the monopolists profit, as a function of the quantity of output it produces.

b) If the monopolist must charge the same price for all units of output that it sells (that is, if the monopolist is a single price monopolist), what level of output will maximise the monopolists profit? What price will the monopolist charge? What is its level of profit?

c) If this were a competitive market instead of a monopoly, what level of output would be produced and what price would be charged? What is the level of profit for firms if it were perfectly competitive?

d) Draw a diagram of demand, marginal revenue, and marginal cost that illustrates your answer to part b). From this work out consumer surplus and producer surplus.

e) Draw the same diagram but for your answer to c), the case of the competitive market. From this work out consumer surplus and producer surplus. How much deadweight loss is there from the monopoly? Why?

You have been asked by the Head of the Oil Group at the Federal Trade Commission to assess whether the upstream portion of the oil industry faces insufficient concentration. She has told you that you may assume demand for crude oil is given by P=a-bq and that firms in this industry face a cost function given by C=cq+F.

a) Briefly describe the type of activity defined as upstream.

b) Prove mathematically that a monopolist will charge a higher price than a firm operating in a competitive market (in other words show me the monopoly price and quality and the competitive price and quantity and explain which qm<qc; pm>pc).

c) Assume that the oil market characterized by Cournot Oligopoly of N firms. , as N approaches, P and Q will approach the competitive outcome.

1. Which of the following is true under a monopoly?

  • A. Monopolist chooses the highest possible price.
  • B. Monopolist chooses a price that is always higher than marginal cost of production.
  • C. Marginal revenue of a monopolist is price.
  • D. None of the above are true for monopoly.

2. You are the manager of a monopoly that faces a demand curve described by P = 230 -20Q. Your costs are C = 5 +30Q. The profit-maximizing output for your firm is:

  • A. 4
  • B. 5
  • C. 6
  • D. 7

3. Which of the following is true?

  • A. A monopolist produces on the inelastic portion of its demand.
  • B. A monopolist always earns an economic profit.
  • C. The more inelastic the demand, the closer marginal revenue is to price.
  • D. In the short run a monopoly will shutdown if P < AVC.

4. In a competitive industry with identical firms, long rum equilibrium is characterized by:

  • A. P = AC
  • B. P = MC
  • C. MR = MC
  • D. All of the above

5. You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q2. Your firm's maximum profits are:

  • A. 125
  • B. 250
  • C. 100
  • D. 85

6. A perfectly competitive firm faces:

  • A. A perfectly elastic demand function
  • B. A perfectly inelastic demand function
  • C. a demand function with unitary elasticity
  • D. none of the above

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