Question

1. Assume that electricity production has been done by several regional firms in the U.S. each operating as a pure monopoly.
   
   

1. Explain and graphically illustrate how the electrical monopolist would determine its profit maximizing price and output level. (Label Pm and Qm)

2. Identify any area of consumer and/or producer surplus for the profit maximizing monopoly.

3. Identify the deadweight loss for the monopolist.

2. Now assume the federal government imposes a regulation on the monopoly. Draw a new monopoly graph for part 2.
   
   

1. Show and explain how the regulated electrical monopolist would determine its profit-maximizing price and output level. (Label Pr and Qr)

2. Identify any area of consumer surplus and/or producer surplus for the profit maximizing monopoly.

3. Now the federal government decides to deregulate the market for electricity nationwide. Draw a new monopoly graph for part 3.
   
   

1. Show and explain how deregulation will impact price and output in the now perfectly competitive market for electricity production. (Hint: You should use a monopoly graph to show where the perfectly competitor would set price and quantity.) (Label Ppc and Qpc)

2. Identify any area of consumer surplus and/or producer surplus for the de-regulated monopoly.

Answer 1

1. Graph 1 Price MC Pm Demand MR Output Qm Consumer surplus: Blue co Producer surplus: Pink colored area Deadweight loss: Green colored area lored area

2. Graph 2 Price MC Pr Demand MR Qr Output Consumer surplus: Blue colored area Producer surplus: Pink colored area

3. When a perfectly competitive firm deregulates, its price increases to Pm and quantity decreases to Qm Price MC Pm Ppc Demand MR Om Qpe Output Consumer surplus: Red colored area Producer surplus: Pink colored area