Question

Consider a monopolist power plant with total costs 2Q^2 , where costs and prices are given in dollars. The demanders for power have a demand curve given by

QD(P) =18 − P.

What is the equilibrium price, quantity, consumer surplus, and producer surplus? (5

pts)

Suppose that if this monopolist did not exist, another monopolist with the same cost

would replace it. What is the marginal product of the original monopolist? Is that

greater than or equal to the surplus the original monopolist receives? (10 pts)

Now suppose the replacement monopolist has total costs 27 Q2 . What is the marginal

product of the original monopolist? Is that greater than or equal to the surplus the

original monopolist receives? (10 pts)

Now suppose the monopolist has no possible replacement. What is the marginal

product of the original monopolist? Is that greater than or equal to the surplus the

original monopolist receives? (10 pts)

Consider again the situation on part d with no possible replacement. Suppose that

power has a social cost of X dollars per unit produced because of the pollution generated. Each unit produced creates a negative externality. At what X , does the

monopolist’s marginal product equal its surplus? That is, at what size of an externality, is the market with a monopolist efficient? (15 pts)

Answer 1