Output of Profit Maximizing Monopolist
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1. Explain what, if any, each of the following government actions will have on the output of a profit maximizing monopolist, assuming that none of the actions is so severe as to make the monopolist shut down. Use a graphical model to demonstrate each of the following effects.
a. A license fee to be paid for the privilege of operating and which does not depend on the level of output.
b. A proportional tax on profits, say 50%.
c. A tax on every unit of output produced that is equal to some constant number of dollars.
2. Suppose a condominium community consists of five residents: A, B, C, D, and E. They are interested in purchasing the services of a security company which will supply security guards at a cost of $200 per week each. The provision of security is a pure public good - when a security guard is hired by any one individual, security is provided to the entire community. The attached table illustrates the value of security to each resident of the community (where the marginal benefits are expressed in terms of willingness to pay). Thus, for example, resident A would be willing to pay $100 for the first guard, an additional $80 to have another guard, and so on.
a) From the community's point of view, what is the optimal number of guards to hire?
b) If the hiring of security guards is left up to individual residents, how many would be hired?
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Marginal benefits are studied and the solution details are provided.
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1. Explain what, if any, each of the following government actions will have on the output of a profit maximizing monopolist, assuming that none of the actions is so severe as to make the monopolist shut down. Use a graphical model to demonstrate each of the following effects.
a. A license fee to be paid for the privilege of operating and which does not depend on the level of output.
The first order condition for the monopolist to maximize profit is: MC = MR
Since the license fee can be treated as increase in the fixed cost, and doesn't affect the marginal cost, there's no change in the monopolist's production side. Therefore, the output level doesn't change at all.
b. A proportional tax on profits, say ...
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