Question

Question: Use the accompanying graph to answer the questions that follow.

a. Suppose this monopolist is unregulated. (1) What price will the firm charge to maximize its profits?(2) What is the level of consumer surplus at this price?

b. Suppose the firm’s price is regulated at . (1) What is the firm’s marginal revenue if it produces units? (2) If the firm is able to cover its variable costs at the regulated price, how much output will the firm produce in the short run to maximize its profits? (3) In the long run, how much output will this firm produce if the price remains regulated at ?

Short answer

Answer

a.

1.A monopolist with no restraints would choose as their price to maximize its profits.

2.The consumer surplus isat this price.

b.

1. The marginal revenue at 7 units of output is . It is same as marginal revenue since monopolists can sell up to units for each.

2. When the output is 13 units, the firm will maximize its profits.

3. Output is zero units if the price is $80 in the long run.

Step-by-step solution

Market

Any field of commerce in which buyers and sellers interact, and where prices in one area influence pricing in another signifies market.

 Step 2: Profit maximization price in unregulated monopoly

a.

1. An unregulated monopolist decides to create the quantity of good where his marginal revenue equals his marginal costs, i.e., when MR = MC. We expand the line from the monopolist's produced amount to the market's demand curve. It is done to establish the unregulated monopolist price once we've found that point on the graph. On the graph, we can see how this procedure works.

We can see how an unrestrained monopolist would choose as their pricing $125

Consumer Surplus at unregulated price

2. The region of space below both the price line and the demand curve is known as the consumer surplus.

$$\begin{gathered} =\frac{1}{2}\times CE\times EB \\ =\frac{1}{2}\times (200-125)\times (7.5) \\ =\frac{1}{2}\times \left(75\right)\times (7.5) \\ =\$281.25 \end{gathered}$$

Hence, the consumer surplus is $281.25.

Marginal Revenue

b.

1. When the price is regulated, the monopolist now has a different effective demand curve, which is confined to the standard demand curve by the regulated price. A blue line on the graph below depicts the effective demand curve.

As monopolists can sell up to units for each, the marginal revenue for these units is . As a result, if a monopolist sells units at a controlled price of , his marginal revenue is the same as the regulated price. This is indicated by the red line on the graph.

Profit Maximization at regulated price 

2. In the short run, when a firm's variable costs can be covered, it will produce at the point where its marginal revenue equals its marginal costs. As we mentioned in step , the effective demand curve now represents the firm's marginal revenue after the regulation. As a result, the firm will generate the quantity where D = MC in the short term. The green line on the graph below represents this point, and the quantity produced is 13 units.