Suppose a monopoly faces an inverse demand curve of P = 6 - Q and has constant marginal cost of 2.If the government is considering legislation that would regulate price to the competitive level, what is the maximum amount the monopoly would spend on (legal) lobbying activities designed to thwart the regulation?
A)$2.
B)$4.
C)$6.
D)none of the statements associated with this question are correct.

Question

Quizplus · Accepted Answer

The competitive price is where P = MC, which is P = 2 in this case. Therefore, the monopoly would have to set their price at $2 if the regulation was imposed. To avoid this, they could spend up to the difference between their current monopoly price and the competitive price on lobbying efforts, which is $4 (from P = 6 - Q to P = 2). Therefore, the maximum they would spend on lobbying would be $4.

Suppose a Monopoly Faces an Inverse Demand Curve of P