MONOPOLY
Prob-1 Deadweight Loss from Monopoly. The Choba Energy Ltd. (CEL) is a
not-for-profit agency that began providing electricity to the Uniport and
Choba LGA. The Rivers State government helped built the plant for CEL.
Electricity rates are regulated by law and can cover only the costs of
production, delivery, maintenance, and facilities. The electric tariff rates
are based on a four-tier system to encourage conservation. The first tier
represents indoor usage for most residential and the university customers.
Rate for remaining tiers becomes increasingly higher with the amount of
electricity usage.
To document the deadweight loss from monopoly problem, allow the
monthly market supply and demand conditions for electricity in the Choba
LGA to be:
QS = 10P (Market Supply)
QD = 120 – 40P (Market Demand)
Where: Q is electric usage (in wattage) and P is the market price of
electricity (in Naira). Electricity is sold in units of wattage, so a N2 price
implies a user cost of N2 per wattage. Electric demand and supply
relations are expressed in terms of millions of wattage units.
A. Graph and calculate the equilibrium price/output solution. How
much consumer surplus, producer surplus, and social welfare is
produced at this activity level?
B. Use the graph to help you calculate the quantity demanded and
quantity supplied if the market is run by a profit-maximizing
monopolist. (Note: If monopoly market demand is P = N3 – N
0.025Q, then the monopolists MR = N3 – N0.05Q)
C. Use the graph to help you determine the deadweight loss for
consumers and the producer if CEL is run as an unregulated
profit-maximizing monopoly.
D. Use the graph to help you ascertain the amount of consumer
surplus transferred to producers following a change from a
competitive market to a monopoly market. How much is the
net gain in producer surplus?
Prob. 2 Monopoly Price/Output Decision. Uyo Bus Services (UBS), has a
monopoly in the Uyo municipal transportation market because of
restrictive licensing requirements, and not because of superior operating
efficiency. As a monopoly, the UBS provides all industry output. For
simplicity, assume that the UBS operates a chain of buses and that each
has an average passenger activity level of 750 passengerss per month,
with Marginal Cost = Average Total Cost = N20 per styling.
Assume that demand and marginal revenue curves for passengers in
the Uyo market are
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P = N80 – N0.0008Q
MR = N80 – N0.0016Q
Where P is price per unit, MR is marginal revenue, and Q is total firm
output (passengers).
A. Calculate the competitive market long-run equilibrium activity level,
and the monopoly profit-maximizing price/output combination.
B. Calculate monopoly profits, and discuss the monopoly problem from
a social perspective in this instance.
Prob. 3 Deadweight Loss From Monopoly. The Onondaga County Resource
Recovery (OCRRA) system assumed responsibility for solid waste
management on November 1, 1990, for thirty-three of the thirty-five
municipalities in Onondaga County, New York. OCRRA is a non-profit
public benefit corporation similar to the New York State Thruway
Authority. It is not an arm of county government. Its Board of Directors is
comprised of volunteers who develop programs and policies for the
management of solid waste. The OCRRA Board is responsible for
adopting a budget that ensures there will be sufficient revenues to cover
expenditures. It does not rely on county taxes. OCRRA has implemented
an aggressive series of programs promoting waste reduction and
recycling where markets exist to create new products. While a number of
communities struggle to surpass the 20% recycling mark, Onondaga
County’s households and commercial outlets currently recycle more than
67% of the waste that once was buried in landfills. Converting nonrecyclable waste into energy (electricity) is also a top priority.
To show the deadweight loss from monopoly problem, assume that
monthly OCRRAs market supply and demand conditions are:
QS = -2,000,000 + 10,000P (Market Supply)
QD = 1,750,000 – 5,000P (Market Demand)
where Q is the number of customers served, and P is the market price of
annual trash hauling and recycling service.
A. Graph and calculate the equilibrium price/output solution. How
much consumer surplus, producer surplus, and social welfare is
produced at this activity level?
B. Use the graph to help you determine the deadweight for consumers
and the producer if the market is run by unregulated profitmaximizing monopoly. (Note: If monopoly market demand is P =
N350 – N0.0002Q, then the monopolist’s MR = N350 – N0.0004Q.)
Prob. 4 Wealth Transfer Problem. The Organization of the Petroleum Exporting
Countries (OPEC) was formed on September 14, 1960 in Baghdad, Iraq.
The current membership is comprised of five founding members plus six
others: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar,
Saudi Arabia, the United Arab Emirates and Venezuela. OPECs stated
mission is to bring stability and harmony to the oil market by adjusting
their oil output to help ensure a balance between supply and demand. At
least twice a year, OPEC members meet to adjust OPECs output level in
light of anticipated oil market developments. OPEC’s eleven members
collectively supply about 40 per cent of the world’s oil output and possess
more than three-quarters of the world’s total proven crude oil reserves.
To demonstrate the deadweight loss from monopoly problem,
imagine that market supply and demand conditions for crude oil are:
QS = 2P (Market Supply)
QD = 180 – 4P (Market Demand)
where Q is barrels of oil per day (in millions) and P is the market price of
oil.
A. Graph and calculate the equilibrium price/output solution. How
much consumer surplus, producer surplus, and social welfare is
produced at this activity level?
B. Use the graph to help you ascertain the amount of consumer
surplus transferred to the monopoly producer following a
change from a competitive market to a monopoly market.
How much is the net gain in producer surplus?
Prob. 5 Monopoly Profits. Parvati Fluid Controls, Inc., (PFC) is a major
supplier of reverse osmosis and ultrafiltration equipment, which helps
industrial and commercial customers achieve improved production
processes and a cleaner work environment. The company has recently
introduced a new line of ceramic filters that enjoy patent protection.
Relevant cost and revenue relations for this product are as follows:
TR = N300Q – N0.001Q2
MR = TR/Q = N300 – N0.002Q
TC = N9,000,000 + N20Q + N0.0004Q2
MC = TC/Q = N20 + N0.0008Q
where TR is total revenue, Q is output, MR is marginal revenue, TC is
total cost, including a risk-adjusted normal rate of return on investment,
and MC is marginal cost.
A. As a monopoly, calculate PFCs optimal price/output combination.
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B. Calculate monopoly profits and the optimal profit margin at this
profit-maximizing activity level.
Prob. 6 Monopoly versus Competitive Market Equilibrium. During recent years,
MicroChips Corp. has enjoyed substantial economic profits derived from
patents covering a wide range of inventions and innovations for
microprocessors used in high-performance desktop computers. A recent
introduction, the Penultimate, has proven especially profitable. Market
demand and marginal revenue relations for the product are as follows:
P = N5,500 – N0.005Q
MR = TR/Q = N5,500 – N0.01Q
Fixed costs are nil because research and development expenses have been
fully amortized during previous periods. Average variable costs are
constant at N4,500 per unit.
A. Calculate the profit-maximizing price/output combination and
economic profits if MicroChips enjoys an effective monopoly
because of patent protection.
B. Calculate the price/output combination and total economic profits
that would result if competitors offer clones that make the market
perfectly competitive.