In: Economics
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?
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.