6. 1a) A monopoly is facing the demand and marginal cost curves which is P = 12 – 0. 002Q and MC = 3 + 0. 001Q. When the demand curve is P = a- bQ, the marginal revenue curve will be MR = a- 2bQ , therefore, MR = 12 – 0. 004Q. (Refer to figure1) Figure 1 To maximize the profits, the company should produce at the output level where marginal revenue is equal to marginal cost. If the marginal revenue is higher than marginal cost, the firm can increase profit by producing more. If the marginal cost is higher than marginal cost, the firm can increase profit by producing less.
When marginal is equal to marginal cost, the firm cannot increase profit further. Marginal revenue is equal to marginal cost, which is 3 + 0. 001Q equal to 12 – 0. 004Q, the profit maximizing output is 1800 at $4. 8. ( Refer to figure 2) Figure 2 6. 1aii) The allocative efficiency occurs when demand is equal to marginal cost. The value that consumers place on a good or service which reflected in the price they are willing and able to pay is equal to the cost of the resources used up in production.
The market is maximizing its social surplus, which is 12 – 0. 02Q equal to 3 + 0. 001Q, the socially efficient output level is 3000. 6. 1aiii) The price ceiling is the government requires that the market price cannot rise above certain level. Induce the monopoly to produce at socially efficient output level is 3000, so the price ceiling should be at $6. 6. 1b) Suppose a monopoly produces and sells a product which incurs external costs during the production process. It is possible for this firm to reach allocative efficiency in the absence of government intervention.
The monopoly will definitely produce at the quantity when marginal cost is equal to marginal revenue to maximize its profit. Refer to figure 3, in this case, the quantity is Q0 and the market price is P0. However, the marginal cost curve will move upward because there is an external costs. Assuming the magnitude of XC can exactly make the new marginal cost curve intersect the demand curve at the point where the quantity is Q0 and price is P0, the firm will reach allocative efficiency. Figure 3 . 1c) The rivalry is the consumption by one person decreases the quantity available for others. A rival good is a good whose consumption by other consumers, for example, food, clothing, air and fish in the ocean. The meaning of excludability is to prevent a person from enjoying the benefits of a goods, however, a goods is non-excludable when it is difficult to exclude non-payers from consuming it, for example, food, clothing and cable TV. 6. 1d) Outdoor musical performance is non-excludable.
It is because the musical performance is outdoor, it cannot prevent people from enjoying the music. If the place has limited seats, it should be rival. However, if the performance is conducted on street, it is non-rival. Weather forecast is non-rival and non-excludable. It is because one more person get access to the weather forecast does not make it any less available to others or diminish its value to other potential users. Also, the weather forecast is available, it s difficult to prevent anyone from knowing it. 6. 2a) Two families live in a remote area in Yuen Long.
Initially there are no street lights on street lights on the footpaths and the two families are planning to install street lights around their area. The families have identical individual demand curves for street lights which can be shown by the equation: P = 25 – Q. On the figure 4, it shows the individual and market demand curves for street lights which DM represent the market demand curve and DI represent the individual demand curves. Figure 4 6. 2b) The market demand curve is the vertical summation of individual demand curve.
Street lights are non-rival and non-excludable consumption. Vertical value means the benefit obtained and the market demand is the summation of the benefit that each consumer obtains from a given quantity. The benefits from using the street lights would not be reduced though someone has used it before. The vertical summation was used to calculate because there is the same quantity of street lights, but the individuals’ benefit is added. The equation of the market demand curve is double to the individual demand curves because two individual are in the market, which is P = 50 – 2Q. . 2c) The optimal quantity is the interception point of the curve of marginal revenue and the curve of marginal cost, which means DM=MC. The equation of the optimal level is 50 – 2Q = 10, which the price of street light is $10. Therefore, the optimal level of street lights to be installed is 20. 6. 2d) Since the street lights is a public good, no one would like to bear the cost for the other users. Without the government intervention, the optimal level of street lights cannot be attained because the transaction cost is too high to identify the right of possessing a public goods.
