Question

In: Economics

Problem: The demand curve facing the monopolist has a constant elasticity of 2. (a) What will...

Problem: The demand curve facing the monopolist has a constant elasticity of 2.
(a) What will be the monopolist’s markup on marginal cost?
(b) The government is considering subsidizing the marginal costs of this monopolist. What level of subsidy should the government choose if it wants the monopolist to produce the socially optimal amount of output?

Solutions

Expert Solution

a)the form which are upstream makes its decisions regarding profit maximization and also charge a price with a Monopoly mark cup over the forms marginal cost.this increased price is then passed on to distributor over the firm does increasing the marginal cost of a distributor. At a price of profit maximizing marginal revenue becomes equal to the marginal cost. Mark upis stated as the differences in between the price and the marginal cost as being a percentage of the marginal cost. The mode the elasticity of a demand curve the lesser is the mark up.
b) market prices are affected by the taxes or the subsidies. In monopolistic market there exist only one seller where the seller fixes low prices. The highest subsidy given by the Government higher is the price fixed by the monopolist. Consumers are benefited from the subsidy but to the extent which is almost half of subsidy. The other half of subsidies get transferred to monopoly. Consumer ultimately pay for that subsidy by the government via taxes.the taxpayers have a net rise of cost which is equal to half of the subsidy transfer to monopoly.


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