Suppose Microsoft computers has a cost curve equal to C = 150Q and faces a demand...

Suppose Microsoft computers has a cost curve equal to C = 150Q and faces a demand curve equal to p = 550 − 2Q. The Bay Area regulators have hired you as a consultant to help them out!

i) Draw the firms MR and MC curves, and find its optimal output q. What would be the firm’s profit?

ii) If regulators set the price equal to the marginal cost, what would be new price? Draw the firm’s new MR and MC curves, and find its new optimal output q. What would be the firm’s new profit?

iii) If the regulators instead imposed a $10/unit tax on the firm’s output, how would it change the firm’s output and price? (Hint: How would this change the firm’s marginal cost?) Do you think this would increase welfare compared to part (i)?

iv) Which of the two interventions do you think is better, and why?

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Expert Solution

Rahul Sunny answered 2 years ago

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