Question

Suppose the market for burritos in Collegetown is dominated by one large monopolist. Market demand for burritos and marginal revenue are given by the equations

Qd = 120 - P

MR = 120 - 2Q

where P is the price of burritos and Q is the quantity of burritos.

Suppose furthermore that the total cost and marginal cost of producing burritos are given by the equations

TC = 10 + 60Q + Q^2 (Q^2 means Q squared)

MC = 60 + 2Q

Part 1:

Suppose that the city of Collegetown breaks up the burrito monopoly into many smaller, competitive firms. For simplicity, assume that the monopolist's original MC curve becomes the market supply curve; that is,

QS = 0.5P – 30

What will be the market equilibrium price?

Part 2:

Unfortunately, burritos create a certain negative externality. (Need I be graphic?) The marginal external cost is calculated to be 15 per burrito. What is the socially efficient quantity of burritos? Assume that the market is competitive as in 2.2.

Part 3:

What is the tax per burrito on the competitive burrito sellers that would achieve the economically efficient outcome? (Assume that the market is competitive as in 2.2.)

Part 4:

Now suppose that burritos are monopolized as in the first part of this question, AND that they generate an externality, as in the last part. What is the tax per burrito that would achieve the economically efficient outcome?

Answer 1