Question

Assume Stratous (of the United States) and Mitsuship (of japan) rival for monopoly profits in the British ship market. Suppose the two firms face identical cost and demand conditions, as seen on the graph below. Suppose the Japanese government provides Mitsuship a subsidy of $20 on each ship produced, and that the subsidy convinces Stratous to exit the British market. What is the total cost of the Mitsuship subsidy to the Japanese govenment? 75 Demand 60 50 40 MC1 ino subsidvi 20 MC2 (with subsidv) 0 25 30 Quantity 10 12 16 $200 $240 $480 $500

Answer 1

Since the profit-maximising condition of monopoly firm with the subsidy is

MR=MC1

Corresponding to this condition, the quantity is 10 units.

Since the profit-maximising condition of monopoly firm with the subsidy is

MR=MC2

Corresponding to this condition, the quantity is 12 units.

The government subsidy is $20 per unit.

Total subsidy = subsidy* quantity production

=20*12

=$240

Hence option second is the correct answer.