Question

For question 2, please draw the graph.

4) Suppose Microsoft computers has a cost curve equal to C = 150Q and faces a demand curve equal to p = 550 – 22. The Bay Area regulators have hired you as a consultant to help them out! i) Draw the firms MR and MC curves, and find its optimal output qm. What would be the firm's profit? ii) If regulators set the price equal to the marginal cost, what would be new price? Draw the firm's new MR and MC curves, and find its new optimal output qm. What would be the firm's new profit? iii) If the regulators instead imposed a $10/unit tax on the firm's output, how would it change the firm's output and price? (Hint: How would this change the firm's marginal cost?) Do you think this would increase welfare compared to part (i)? iv) Which of the two interventions do you think is better, and why?

Answer 1

Com buty has a cost cure I - suppose equal to Microsoft c = 150 Q and faces a demand cuuc equal to þ- 550-20 02 Now, To tal revenue an a wala TR: POSSOQ-BQ2 and Marginal revenue (MR)= d(TR) = 550-40 and to tal ccost c = 150Q and marginal cost del 150 W ush da Now, minoso but or the monopolist's probit manimi sing condition will be - MR = mc 2) 550- 4Q = 150 =) (550-150) EhQ EQ=100 mts. - Huice optimal input = 100 mits and Price will O bir P = S SOR$400) = 550-200 a $ 350 L - Now, film's Profit will bet Total revenue (P.XQ) - Total cost (e) - (3 Sox 100 = 750 (160) 35,000 - 15,000 = $ 20,000 Scanned with CamScanner

Now, Darand cuand up-550 2Q Quant apie Q = 275 When P=0 = OG Q20 > P-550 Also MRS 550-4Q When Q=0 => MR=55000 - when MR 0 -> Qin 137.5 Dutat and Mc = 15.01 the MR and Mc Cuvesi bus Now we can draw Price. 550 ti 3 SS 350 CORI-211 - E 160 MC Flan 97,5 100 737-5 25 200 275 Quantity co IcSeamed with CamScanner

l et the regulaston sit the price eques to the - marginal cost, - then we will have !! P- ML = 150 - s pz 150 : 2 and optimal out but will be found by substtuting P= 150 in the demand equation - Huice, p=550-2Q Aliw ) - 2) (150 -5.50) - 2Q_ _ | 23.2.20! ( 550-150 CON... - = Q = 200 unitsad bi bilo Mr and Mc Cuve remains the same and output = 200 mits and new probit new l optmal ong in N.(P x Q) - Children wereld also X 200 - 150 (200) A M = 30,000 - 30, ovo AN din of the regulator instead imposed a & 10 mit fanon firm's output,ital so - then Marginal cost will be..) 2201 wrowbrah MC = (1 so tlo beurban dá zod 21.60 pm hence the marginal cost cuve will shift upward, I Scanned with CamScanner

i Nows Pio bit maximising for Probit maximising condition will beirt Cond MRE MC : le gestellt 550-4Q = 160 21 3):4Q390 _Q_ 97,5 DA DAMU i ! Aud pice will bc 22 pa 550--269.715) 3 = 355 Itnice now biom's output will be 97.5 hits and price will be $ 355 This will increase wel face compared to part (i) in bccare here the lost suplus orra - audio deadweight loss ie Area of A ADE is Smalles than the deadweight loss tu partir le area Dom ABC - ( 021) (1) The regulation where Price = Marginal cost is bitte be care at that levilor fiim tot opuates in a perfectly competettive na manner and there is no welfare loss or deadweight loss. In case of tau, Welfare loss is reduced but there is still Some amount of well face loss. Jo Huice Price eqrals. Marginal Cost regulation it always beltar CamScanner