Enrodes is a monopoly provider of residential electricity in a region of norther
ID: 1221767 • Letter: E
Question
Enrodes is a monopoly provider of residential electricity in a region of northern Michigan. Total demand by its 5 million households is Qd = 1,000 - 2P, and Enrodes can produce electricity at a constant marginal cost of $5 per megawatt hour. Consumers in this region of Michigan have recently complained that Enrodes is charging too much for its services. In fact, a few consumers are so upset that they’re trying to form a coalition to lobby the local government to regulate the price Enrodes charges. If all the consumers of this region joined the coalition against Enrodes, how much would each consumer be willing to spend to lobby the local government to regulate Enrodes’s price?
Explanation / Answer
The required willingness to spend is the difference between monopoly price and perfectly competitive price.
Q = 1,000 - 2P
2P = 1,000 - Q
P = 500 - 0.5Q
Total revenue, TR = P x Q = 500Q - 0.5Q2
Marginal revenue, MR = dTR / dQ = 500 - Q
A monopolist will maximize profit by equating MR with MC:
500 - Q = 5
Q = 500 - 5 = 495
P = 500 - (0.5 x 495) = 500 - 247.5 = 252.5
But a perfect competitor maximizes profit by equating P with MC:
So the perfectly competitive price = MC = $5.
Maximum willingness to spend per consumer = Price difference = $(252.5 - 5) = $247.5
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