Monopoly markets

timer Asked: Dec 9th, 2015

Question description

A city is considering providing internet to its citizens. The market demand in their city is estimated to be P = 20 - 0.1Q, where Q is in thousands of households served and P is price of mostly service in 10's of dollars. The marginal cost is P = 1+0.001Q. Some people in the city council want to own and operate the system for a profit, making the city of monopoly internet provider.

a. If it does become a monopoly, what will be the P and Q of internet in the city? Calculate this numerically and show your work. What is the city's mark-up over marginal cost?

b.What is the price elasticity of demand at this outcome? How is this number related to the mark-up you calculated in the first part?

c. If instead the city decides to provide the service at the efficient level, what would be the price and output? Compare the monopolist vs. efficient outcome, what is the deadweight loss involved in allowing the city to be a monopolist? Provide a sketch.

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