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Chapter 10: Q17. (page 411)

A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the citizens,it makes economic sense to charge a monopoly price for electricity. True or false? Explain.

Short Answer

Expert verified

The given statement is false because the electricity produced in a monopoly market structure is much less than that produced in a competitive market.

Step by step solution

01

Step 1. Reason

Northstar Electric operates as a monopoly in the town, and the profits generated are distributed among the citizens. Although the profit earned by a monopoly exceeds the profit earned by a competitive firm, the quantity sold differs. The electricity produced in a monopoly market structure significantly falls short of a competitive firm's equilibrium quantity.

Although the citizens can obtain monopoly profits, they cannot consume the extent of electricity that would have been available to them if the market was a competitive one. Thus, the CEO should consider the deadweight loss (social loss) associated with the monopoly in terms of the low equilibrium quantity, thereby not charging a monopoly price from the citizens.

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Most popular questions from this chapter

There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 50 - P. Lake Wobegon Electric鈥檚 (LWE) cost of producing electricity is TC = 500 + Q.

a. If the regulators of LWE want to make sure that there is no deadweight loss in this market, what price will they force LWE to charge? What will output be in that case? Calculate consumer surplus and LWE鈥檚 profit with that price.

b. If regulators want to ensure that LWE doesn鈥檛 lose money, what is the lowest price they can impose? Calculate output, consumer surplus, and profit. Is there any deadweight loss?

c. Kristina knows that deadweight loss is something that this small town can do without. She suggests that each household be required to pay a fixed amount just to receive any electricity at all, and then a per-unit charge for electricity. Then LWE can break even while charging the price calculated in part (a). What fixed amount would each household have to pay for Kristina鈥檚 plan to work? Why can you be sure that no household will choose instead to refuse the payment and go without electricity?

A firm faces the following average revenue (demand)curve:

P = 120 - 0.02Q

where Q is weekly production and P is price, measured in cents per unit. The firm鈥檚 cost function is given by C = 60Q + 25,000. Assume that the firm maximizes profits.

a. What is the level of production, price, and total profit per week?

b. If the government decides to levy a tax of 14 cents per unit on this product, what will be the new level of production, price, and profit?

Will an increase in the demand for a monopolist鈥檚 product always result in a higher price? Explain. Will an increase in the supply facing a monopsonist buyer always result in a lower price? Explain.

The following table shows the demand curve facing a

monopolist who produces at a constant marginal cost of $10:

Price

Quantity

18

0

16

4

14

8

12

12

10

16

8

20

6

24

4

28

2

32

0

36

a. Calculate the firm鈥檚 marginal revenue curve.

b. What are the firm鈥檚 profit-maximizing output and price? What is its profit?

c. What would the equilibrium price and quantity be in a competitive industry?

d. What would the social gain be if this monopolist were forced to produce and price at the competitive equilibrium? Who would gain and lose as a result?

Caterpillar Tractor, one of the largest producers of farm machinery in the world, has hired you to advise it on pricing policy. One of the things the company would like to know is how much a 5-percent increase in price is likely to reduce sales. What would you need to know to help the company with this problem? Explain why these facts are important.
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