(16 points) The accompanying diagram depicts a monopolist whose price is regulat
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Question
(16 points) The accompanying diagram depicts a monopolist whose price is regulated at $10 per unit. Use this figure to answer the questions that follow. a. What price will an unregulated monopoly charge and what quantity will an unregulated monopoly produce? Explain. b. How many units will a monopoly produce when the regulated price in $10 per unit? Explain. c. Determine the quantity demanded and the amount produced at the regulated price of $10 per unit. Is there a shortage or a surplus? Explain. d. Determine the regulated price that maximizes social welfare. Is there a shortage or a surplus at this price? (Note that the price maximizes social welfare is P = MC). Explain.Explanation / Answer
a. The unregulated monopoly will produce to maximize its profit. So they will produce output corresponding to which marginal revenue is equals marginal cost. From the graph, it is found that the unregulated monopoly will produce 4 units of quantity and will charge price equal to $16.
b. At price $10 the monopolist will produce where it could cover its additional cost of production. Hence, it will produce 2 unit of quantity. It will not produce more than that because for each additional unit increase in production, the marginal cost rises above per unit of revenue, and firm incur loss. So it will produce where P=MC.
c. The quantity produced at regulated rice is 2 units. Since the demand (D) is greater than the supply, 2, there is shortage of good in the market.
d. The social maximizing price is charged at per the marginal cost. Hence, the price will be $14.
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