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This problem set considers several issues related to monopolies and price regulation. First, we ask how price regulation influences the monopolist's price and output decisions. We then compare the price and output decisions of regulated monopolists and of unregulated monopolists to the efficient price and output decisions made in a competitive industry. By making these comparisons we can describe the inefficiencies caused by monopoly. We can also ask if regulation can eliminate these inefficiencies. Consider the following case study: The Fibbonacci Family (FF) owns a pizza parlor across the street from a large urban university. It is the only pizza parlor in the neighborhood. FF's short run total cost function is TC=2400 + 60Q + .50Q² . The associated marginal cost function is MC = 60 + Q. The demand function FF faces is given by Q = 220 - P. There is a graph of the firm's demand and cost curves at the bottom of the page. It is to scale.  You can right click on the graph to save it, then print it out.  Since it is to scale you can use a ruler and pencil to check your algebraic answers.

1. What is the equation for FF's short run average cost function? Hint: Divide total cost by quantity.

2. What is the equation for FF's marginal revenue function? Hint: MR has the same intercept as the demand curve, but falls twice as fast.

3. What is FF's profit maximizing output ? What price will it charge ? What profit will it earn ? (Hint: Equate marginal revenue to marginal cost and solve for quantity, then plug that quantity into the demand curve to get price. To organize your thinking it might help to draw a picture for yourself.)

4. Suppose that the Pizza Consumer's Protection Commission wished output and price to mimic the competitive outcome since it is economically efficient. Toward this end they fix a maximum price equal to that point where the marginal cost curve crosses the demand curve. What output will FF choose to produce?

5. How do the new price and output choices compare with the unregulated case? The regulated price is higher lower. The regulated quantity is greater smaller.

6. Suppose the regulated price were above that described in question 5. Would the regulated monopolist supply all the pizza that consumers were prepared to buy? Yes No. (Hint: In answering this question work from a diagram showing your choice of price ceiling and the resulting MR and demand curves.)

7. Suppose that the regulated price were chosen so that it corresponded to the intersection of the Average Total Cost and demand curves. What will be the regulated monopolist's choices for priceand output? Does supply equal demand? Yes No. Is this price-output choice efficient, in the economic sense? Yes No