02 Jun Question 9. (Competition and Surplus)
Question
9. (Competition and Surplus)
(a) Suppose that the demand curve for eggs is Q = 80 – 4p and the supply curve is Q = 6p. The eggsproducers’ lobby has successfully convinced the government to impose a price floor of p = 10. A newly elected government is considering dropping this price floor and allowing market forces to set the price of eggs. Describe how the price and quantity would change, and the effect on consumer, producer,
and total surplus.
(b) Suppose the government does not want to maximize total surplus, but instead maximizes “weighted
total surplus”, WTS = CS + w × PS, where w is the weight the government puts on eggs producers’
surplus, which could exceed or be less than 1.What value of w would lead to the government being
indifferent between keeping the price floor and removing it?
10. (Market Failure and Monopoly)
a) The demand for high-speed cable Internet in the Yukon Territory is given by Q = 10 – p. The cost of
providing the service is C = 16 + 2Q. Assume that the government grants a license to supply this service to only one firm (i.e. a monopoly). What is the profit-maximizing price and quantity? What is the dead weight loss from monopoly? Illustrate this deadweight loss in a diagram.
b) Residents of the Yukon complain about high prices so the government decides to give licenses to any
legitimate applicant. Any entrant would have the same cost function as the incumbent. Is there an
incentive for another firm to enter this market and compete with the incumbent? Explain your answer.
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