Question

2- There are 100 supermarkets in a competitive market in Springfield. They all have a constant marginal cost of $1000 per unit of output. Demand for supermarket output by Springfield citizens can be represented by (when P > 0) P Q = 100,000 (16 1000

Answer 1

Q=100,000(16-P/1000)

P=16000-Q/100

n=100

MC=1000

All supermarkets are symmetric

Demand eq of each supermarket: q=1000(16-P/1000) P=16000-q

Profit max of each supermarket:

(max wrt to q) [ (16000-q)q – 1000q ]

FOC(q) =0

q=3000

Q=300,000

P=10,000

Profit of each supplier, W = Pxq-1000q

Profit all suppliers = W*100

Consumer Surplus = 0.5(16000-P)(Q-0)

Total Surplus = CS+PS

Monopoly:

One supplier

Profit of BartBarn = (16000-Q/100)Q-1000Q

FOC(Q)=0

Q*=750,000

P*=8500

Profit of BB=P*xQ*-1000Q

Consumer Surplus = 0.5(16000-P*)(Q*)

Profit to BB = P*xQ*-1000Q* ---- (a)

Total Surplus = CS+PS

f) Compare Total Surplus, CS, PS in both the cases

Difference in total surplus means there is DWL resulting from monopoly.

g)

The max price Bart may be willing to pay is bounded by the profit he makes when he enters the market which is (a)

There will be a transfer of surplus. PS will become zero and will be transferred to the govt.

CS will remain unchanged as a result of the license.