Question

Enrodes is a monopoly provider of residential electricity in a region of northern Michigan. Total demand by its 5 million households is Q^d = 1,200 - 2P, and Enrodes can produce electricity at a constant marginal cost of $4 per megawatt hour. Consumers in this region of Michigan have recently complained that Enrodes is charging too much for its services. In fact, a few consumers are so upset that they’re trying to form a coalition to lobby the local government to regulate the price Enrodes charges.

If all the consumers of this region joined the coalition against Enrodes, how much would each consumer be willing to spend to lobby the local government to regulate Enrodes’s price?

Instruction: Enter your response rounded to the nearest penny (two decimal places).

$  

True or false: The consumers are likely to be successful in their efforts.

Answer 1

Given, Q_D = 1,200 - 2P

2P = 1,200 - Q_d

P = 600 - 0.5Q_D

Total Revenue , TR = 600Q - 0.5Q_D²

MR = 600 - Q_D

Marginal cost, MC = $ 4

Monopolist will maximize profit at MR = MC

600 - Q = 4

Q_M = 596 units

P = 600 - 0.5*596

P_M = $ 302 per unit

Monopoly profit = P_MQ_M- C*Q_M = $302*596 - $4*596 = $ 177,608

When the consumers make a coalition then they will be ready to pay the price equal to perfect competition. The government will regulate the price and will set equal to perfect competition

Thus, P = MC

600 - 0.5Q = 4

0.5Q = 596

Q* = 1,192 units

P* = $ 4

Since, the price is set equal to Marginal cost therefore, profit will be zero.

Thus, the firm will be ready to pay $ 177,608 , if regulation is imposed.

The consumers will be ready to pay

$ 177,608/5,000,000= $ 0.035521

Every consumer will be ready to pay $ 0.04

The monopolist is a single entity and by avoiding the regulation the monopolist will earn private gain.

Hence, being a single entity the monopolist can avoid lobbying activity.

False.

Please refer Managerial Economics by Michael Gaye.