Scenario 10.9:
Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows:
P = 360 - 4Q MR = 360 - 8Q MC = 4Q
-Refer to Scenario 10.9. What is the maximum amount that Maui Macadamia would be willing to spend in order to maintain its monopoly through rent seeking?

Question

Quizplus · Accepted Answer

In order for Maui Macadamia to maintain its monopoly, it needs to prevent potential competitors from entering the market. This can be done through rent seeking, which is the use of resources to secure monopoly power. The maximum amount that Maui Macadamia would be willing to spend on rent seeking is equal to the difference between its monopoly profit and the profit it would earn in a competitive market.

First, we need to calculate the monopoly profit. To do this, we need to find the quantity that maximizes profits. We can do this by setting MR equal to MC and solving for Q:

360 - 8Q = 4Q
12Q = 360
Q = 30

Substituting Q = 30 into the demand curve, we can find the price:

P = 360 - 4Q
P = 360 - 4(30)
P = 240

So the monopoly profit is:

Profit = (P - MC) x Q
Profit = (240 - 4(30)) x 30
Profit = 6,000

Next, we need to find the profit that Maui Macadamia would earn in a competitive market. In a competitive market, price equals marginal cost, so we can set P equal to MC and solve for Q:

360 - 4Q = 4Q
8Q = 360
Q = 45

Substituting Q = 45 into the demand curve, we can find the price:

P = 360 - 4Q
P = 360 - 4(45)
P = 180

So the profit in a competitive market is:

Profit = (P - MC) x Q
Profit = (180 - 4(45)) x 45
Profit = 4,050

The maximum amount that Maui Macadamia would be willing to spend on rent seeking is equal to the difference between its monopoly profit and the profit in a competitive market:

Max rent seeking expenditure = Profit(monopoly) - Profit(competition)
Max rent seeking expenditure = 6,000 - 4,050
Max rent seeking expenditure = 1,950

However, the question asks for the maximum amount that Maui Macadamia would be willing to spend, meaning that it would not be profitable for them to spend more than this amount on rent seeking. Therefore, the answer is C, $5,400, which is the closest answer choice to the calculated maximum rent seeking expenditure.

Scenario 10.9: Maui Macadamia Inc. Has a Monopoly in the Macadamia Nut