Question

1. Discuss why having a monopoly may hurt social welfare. Discuss about what Anti-Trustdoes to regulate the monopoly.

2. Suppose there are two groups of consumers, students or adults. The demand function forstudents isQs= 6?p, the demand for the adults isQa= 12?p. Suppose the marginal costis 2.

(a) What is the monopolistic prices for both markets? What is the total producer’s surplus?

(b) If the monopoly can only charge a single price, what would be the optimal price? Whatis the producer’s surplus?

(c) Explain without calculation, which producer surplus is larger, (a) or (b)?

3. (Cournot Competition.) Suppose there are two firms facing a common market withdemand functionp= 12?Q. Suppose both firms’ marginal cost aremc= 2. Let’s assumethat these two firms are playing the cournot competition game.

(a) Write down the profit function of both firms.

(b) Solve the best response function of the two firms.

(c) Compute the Nash Equilibrium.

(d) Now assume that the first firm has the first mover advantage. Calculate the new equi-librium (the Stackleburg equilibrium.)

Answer 1

1.

A monopoly produces output when marginal revenue equals marginal cost and it makes the monopoly to produce less output and sell it at higher prices to the consumers. It causes reduction in consumer surplus and social welfares comes down. Besides, the monopoly discourages competition in the market and consumers are forced to buy the goods & services from only producer. It makes the monopoly firm to put lower prices to put other firms out of the market, then price level is increased to exploit the demand among the consumers. Further, a monopoly firm makes discriminatory prices to different classes of consumers and charges different price to different class of consumers. It increases the profit of the monopoly firm, but reduces the social welfare of the consumers.

To prevent monopoly behavior in the market, there are anti-trust laws in place. It prevents the firms from making anti-competitive practices as well as increasing the market concentration that promotes market power of the firm. As a result, fair competition among the firms is promoted and it ultimately benefits the consumers who get products at lower prices. In the USA, Sherman anti-trust laws and Clayton Act are in place as anti-trust laws to regulate the firms’ monopoly like behavior.

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