Analyze effect of regulation on allocation of resources

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Reference no: EM13892792

Question 1a. How will the marginal and average cost curves of the typical pure competitor shift or change as a result of the following events:

(a) an increase in wages of all labor; (b) an increase in the rental payments on office machinery; (c) a technological advance; (d) an increase in sales taxes; (e) an increase in property taxes; and (f) a decline in the price of a basic raw material?

b. The agricultural market for maize can be characterized as a purely competitive industry. How might the following events affect the short-run cost curves and output for a firm in the industry?

(a) A reduction in the cost of fertilizer that is sold to maize farmers.

(b) The Kenya Revenue Authority (KRA) changes tax laws which increase the amount of depreciation that farmers can deduct for equipment.

Question 2. In the table below are cost and demand data for a pure monopolist.

Quantity demanded	Price	Marginal revenue	Average cost	Marginal cost
0	$35.00
1	32.00	$ 32.00	$48.00	$48.00
2	29.00	26.00	30.00	12.00
3	26.00	20.00	23.34	10.00
4	23.00	14.00	21.00	14.00
5	20.00	8.00	20.00	16.00
6	17.00	2.00	19.50	17.00
7	14.00	-4.00	19.28	18.00
8	11.00	-10.00	18.68	18.50
9	8.00	-16.00	18.72	19.00

(a) What is the level of price, output, and amount of profit for an unregulated monopolist?

(b) Using the data in the table, what are the price, output, and profit for a regulated monopolist that sets price equal to marginal cost compared with an unregulated monopolist?

(c) Using the data in the table, what are the price, output, and profit for a regulated monopolist that charges a "fair-return" price compared with an unregulated monopolist?

(d) Analyze the effect of regulation on the allocation of resources. Which situation is most efficient? Which situation is most likely to be chosen by government? Why?

Question 3. Assume that the short-run cost and demand data given in the table below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. Compute the marginal cost and marginal revenue of each unit of output and enter these figures in the table.

Output	Total cost	Marginal cost	Quantity demanded	Price	Marginal revenue
0	$ 75		0	$180
1	120	$_____	1	165	$_____
2	135	_____	2	150	_____
3	165	_____	3	135	_____
4	210	_____	4	120	_____
5	270	_____	5	105	_____
6	345	_____	6	90	_____
7	435	_____	7	75	_____
8	540	_____	8	60	_____
9	660	_____	9	45	_____
10	795	_____	10	30	_____

(a) At what output level and at what price will the firm produce in the short run? What will be the total profit?

(b) What will happen to demand, price, and profit in the long run?

Question 4. The kinked-demand schedule that an oligopolist believes confronts the firm is given in the table below. Compute the oligopolist's total revenue at each of the nine prices, and enter these figures in the table. Also compute marginal revenue for each unit between the nine prices and enter these figures in the table below.

Price	Quantity demanded	Total revenue	Marginal revenue per unit
$5.80	50	$_____
5.60	100	_____	$_____
5.40	150	_____	_____
5.20	200	_____	_____
5.00	250	_____	_____
4.80	264	_____	_____
4.60	279	_____	_____
4.40	288	_____	_____
4.20	300	_____	_____

(a) Where is the "kink" in the demand curve? What is the current selling price at that kink and how much output will be demanded?

(b) What is the range of marginal cost that will keep the price set at the kink?

b. Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for a duopoly based either on a high-price or a low-price strategy.

	Firm A
	High-price	Low-price
High-price	A = $150 B = $150	A = $200 B = $ 90
	Firm B
Low-price	A = $ 90 B = $200	A = $100 B = $100

(a) What will be the result when each firm chooses a high-price strategy?

(b) What will be the result when Firm A chooses a low-price strategy while Firm B maintains a high-price strategy?

(d) What will be the result when each firm chooses a low-price strategy?

(e) What two conclusions can you draw about collusion?

Reference no: EM13892792

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