Question

The graph on the right shows the demand, marginal revenue, marginal cost, and average total cost curves for a monopolist. Show the impact if this firm was regulated to charge the fair-returns price? On graph 2: 1.) Using the point drawing tool, place a point at the output and price combination that would result from regulation if the monopoly was required to charge the fair-returns price. 2.) Using the triangle drawing tool, indicate the deadweight loss that would result from this monopoly charging the fair-returns price. Label your area 'DWL. Carefully follow the instructions above and only draw the required object

Answer 1

Fair return price is determined by the interaction between price and average total cost where the firm earn only the normal profits. Efficient output is determined by the interaction between price and marginal cost. Thus, at fair retum price, the firm is producing less than efficient output. Thus, the firm will earn dead weight loss. Price P= ATC Fair return price DWL P-MC Xificeint output MR 50 65 75 Quantity In the above graph, at fair return price, price is $18 and quantity of output is 65 where P= ATC.

The yellow shaded area represents the dead weight loss. Dead weight loss = 0.5*(18-12)*(75-65) DWL = 30