Question

1. A monopolist producer of a drug Zeta has demand P=180 – 0.2q and costs C=5000+30q+0.2q.

1. Derive the MC, ATC, and MR functions.

2. Derive the profit-maximizing price, quantity, and profit. Show on a graph.

3. What is the price and quantity if the monopolist loses patent protection and the industry becomes perfectly competitive? What is the size of the deadweight loss in monopoly? Show the deadweight loss triangle in the graph.

2. Suppose demand for apartments in Honolulu is P=6600-0.5q and supply is P=0.25q.

1. Derive the equilibrium price and quantity for apartments. Show on a graph. Calculate the producer and consumer surplus.

2. If the city of Honolulu passes a rent control, forcing a rent (or price) ceiling equal to $1800, what is the quantity supplied, quantity demanded, and the shortage? Calculate the new consumer surplus, producer surplus, and deadweight loss, and show these on your graph.

3. If a black market develops after the rent control, allowing landlords to charge an illegal rent, what is the highest rent that they could charge for the quantity supplied of apartments in part b?   What is the new producer surplus? Comment on the effectiveness of price controls in allocating apartments to middle to lower income tenants.

Answer 1

Question 1)

Part a)

Part b) Profit is maximized for monopolist at point where marginal revenue equals marginal cost

Part c)  if the monopolist loses patent protection and the industry becomes perfectly competitive

profits maximized at point where price equals marginal cost

Question 2)

Part 1)

Part 2) At rent ceiling of $ 1800,

there is a shortage of 2400 apartments

Part 3)

We have a shortage of apartments.

On the other hand, the consumer will highly demand on the house rents when the price is lower than the equilibrium price. The quantity demanded is higher than the quantity supplied. Rent ceiling also discouraged the landlords to maintain the quality of their rental units. When the quantity demand is high, the suppliers would try their best to reduce the cost of maintenance or even no maintenance so that they would not spend money on the maintenance because the price is set below the equilibrium rent to avoid loss profit.

Usually, the buyers will compete with each other by offering more money. But they are not allowed to do that here. But they will compete in other ways. They will wait in line longer. They will get out of bed earlier and show up at the shop earlier. They will buy from people on the black market. The people who want the goods the most will compete until they have the goods.They will use up resources (time, energy, money) in this competition, but those resources will not go to the seller. Instead, they are lost to society.

the buyers will compete until the price has been driven up to the actual price for 7200 apartments in the market calculated from demand curve.

Producer surplus remians the same equal to area of region GHO

This is the highest rent that could be charged for number of apartments supplied at ceiling price of $1800

Only people willing to pay more than 1800 will end up with the apartments. The most they are allowed to pay in cash is 1800, but they spend 3000. The area between 1800 and 3000 is called the “hidden costs” [area (BGHC)] – hidden because they are not observed in the official transaction. They are the costs of competing for the goods and are lost to society.

rent ceiling only benefits the families which have higher income that already lived in a city for a long time. It is because they are able to pay at a higher price which can satisfy the landlords. The newcomers or poor nation will not able to rent any houses as the landlords are not willing to supply the rental units when the rent control is imposed under the equilibrium price. Not only that, the landlords will make a loss when the price is under the equilibrium price because they need to spend a long time to find a customer who can pay higher price which can satisfy them. This causes the renters and landlords to have difficulties