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 = 65 - 2Q, and your costs are C(Q) = 25Q. 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

P = 65 - 2Q

Then Total revenue (TR) = P * Q = 65Q - 2Q2

Marginal revenue(MR) = 65 - 4Q

Cost[C(Q)] = 25Q

Marginal cost(MC) = 25

Monopolists profit maximization implies MR = MC

65 - 4Q = 25

4Q = 40

Q* = 10 units.

P* = 65 - (2 * 10) = $45

Socially efficient price and output will be found at P = MC

65 - 2Q = 25

Qsocial = 20units.

Psocial = 65 - (2 * 20) = $25

Your firm stands to lose profits of PQ – C(Q) that means P*Q* - 25Q* = $200

if the regulation is imposed. The most you would be willing to spend on lobbying activities is $200.

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