(20 marks) Consider a market where a monopolist operates. (Inverse) market demand is given by
P(qM) = 100 — 2qM. The total cost function of the monopolist is C(qM) = 500 + 201334.
(a) What is the Optimal quantity for the monopolist? What are the monopolist’s pro?ts?
(b) Suppose the regulator wants to tax the monopolist, claiming that its pro?ts are unfairly high.
For every item sold, the monopolist must pay a tax of t = 10. Compute the new equilibrium under
this policy. Compared with what you found in point (a), how much did consumers’ surplus change?
Brie?y comment.
For every item sold, the monopolist must pay a tax of t = 10. Compute the new equilibrium under
this policy. Compared with what you found in point (a), how much did consumers’ surplus change?
Brie?y comment.
(c) Suppose there is a potential entrant (E) with the same technology as the monopolist, who
would offer the same homogeneous good. If the competitor enters, ?rms will compete in a Cournot
duopoly. Hence, (Inverse) market demand will be P(q) = 100 — 2qM — 2qE. Compute the equilibrium
if the competitor enters. Would the competitor be willing to enter?
would offer the same homogeneous good. If the competitor enters, ?rms will compete in a Cournot
duopoly. Hence, (Inverse) market demand will be P(q) = 100 — 2qM — 2qE. Compute the equilibrium
if the competitor enters. Would the competitor be willing to enter?
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