Suppose a monopoly faces an inverse demand curve of P = 300 − 10Q and has constant marginal cost of 20.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) $280
B) $1,960
C) $2,240
D) None of the preceding statements is correct.

Question

Quizplus · Accepted Answer

To find the maximum amount the monopoly would spend on lobbying activities designed to thwart the regulation, we need to calculate the monopoly's profits with and without regulation and find the difference.

Without regulation, the monopoly will produce at the quantity where marginal cost equals marginal revenue:

MR = MC
300 - 20Q = 20
Q = 14

So, the monopoly will charge a price of:

P = 300 - 10Q
P = 300 - 10(14)
P = 160

The monopoly's profits without regulation are:

π = (P - MC)Q
π = (160 - 20)14
π = $2,240

With regulation, the monopoly will have to produce at the competitive quantity, where price equals marginal cost:

P = MC
300 - 10Q = 20
Q = 28

So, the regulated price will be:

P = 300 - 10Q
P = 300 - 10(28)
P = $20

The monopoly's profits with regulation are:

π = (P - MC)Q
π = (20 - 20)28
π = $0

The difference in profits is:

Δπ = $2,240 - $0
Δπ = $2,240

Therefore, the monopoly would spend up to $2,240 on lobbying activities designed to thwart the regulation. However, since lobbying efforts come with a cost, the maximum amount the monopoly would spend is likely less than this amount. A reasonable estimate might be to assume lobbying costs that reduce the net gain in monopoly profits by half, which would leave the monopoly with $1,120 in net gains. Subtracting initial profits from this net gain would lead to lobbying expenditures of $1,960.

Suppose a Monopoly Faces an Inverse Demand Curve of P