As the manager of a monopoly, you face potential government regulation. Your inv

Question

As the manager of a monopoly, you face potential government regulation. Your inverse demand is P = 45 - 1Q, and your costs are C(Q) = 17Q. a. Determine the monopoly price and output. Monopoly price: $ Monopoly output: units b. Determine the socially efficient price and output. Socially efficient price: $ Socially efficient output: units c. What is the maximum amount your firm should be willing to spend on lobbying efforts to prevent the price from being regulated at the socially optimal level? $

Explanation / Answer

Given that the demand function is p=45-q and the cost is c=17q. Now the total revenue is p*q=45q-q2 . Differentiating this we get Marginal Revenue(MR) as 45-2q. Differentiating the cost function we get Marginal cost(MC)=17.

a) For monopoly,

MR=MC

Thus

45-2q=17

Solving for q we get,q=14 and putting this in p=45-q we get p=31

Thus monopoly Price is 31 and quantity is 14

b)For socially efficient price and output, it has to be perfectly competitive

This means that P=MC is the equilibrium

Thus 45-q=17

Solving for q we get q=28

and putting this in p=45-q we get p=17

Thus socially efficient quantity is 28 and price is 17

c)the maximum amount the firm should be willing to spend on lobbying efforts to prevent the price from being regulated at the socially optimal level is 31-17=14

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