You are an industry analyst that specializes in an industry where the market inv

Question

You are an industry analyst that specializes in an industry where the market inverse demand is P = 200 - 4Q. The external marginal cost of producing the product is MCExternal = 6Q, and the internal cost is MCInternal = 12Q.

a) What is the socially efficient level of output?

b). Given these costs and market demand, how much output would a competitive industry produce?

c). Given these costs and market demand, how much output would a monopolist produce?

d). Discuss actions the government might take to induce firms in this industry to produce the socially efficient level of output.

Explain in Detail your answers

Explanation / Answer

Socially efficient:

P = MC, 200 – 4Q = 12Q

Therefore, Q = 25

The government can impose a tax on the firms to reduce the equilibrium quantity to the socially desirable level

Competitive:

AC = AR = 12 – Q = 6Q

Therefore, Q = 1.71

Monopoly:

MR = MC;

MC = 12Q

MR = (PQ)' = (200Q - 4Q²)' = 200 – 8Q

Therefore, 200 – 8Q = 12Q

Q = 10

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