1. An industry has the following cost function: C(X, Y) = 1500+20X+20Y. Market demands for the...

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1. An industry has the following cost function: C(X, Y) = 1500+20X+20Y. Market demands for the 2 goods are given by Px = 80 – X, and Py = 140 - 2Y (80 pts.) (a) Define a natural monopoly. Is this industry a natural monopoly? Explain. (10) (b) Find the Ramsey prices at which a monopolist would just break even (make 0 profit). To do this equate X and Y and solve for the best (from a social welfare point of view) common amount of X and Y that pays the firm zero profit. Are these good prices for a regulator to impose? Explain. (20) (c) Should the regulator impose marginal cost pricing? Why or why not? (10) (d) Under the proposal of Loeb and Magat, a regulator would let a monopolist set any price it likes in each market, and transfer the amount of consumer surplus associated with that price to the firm. Since consumer surplus is equal to the area under the demand curve above the product price, determine the prices a profit-maximizing monopolist would set in each market, and the consumer surplus which would be transferred to the monopolist from each market. (20) (e) Suppose instead of the Loeb and Magat scheme the government wished to use two part tariffs in these markets, and suppose further that two part tariffs are feasible. Imagine that there are 10 consumer in each market. Solve for a set of two part tariffs (one for each martket) that pay the firm zero profits in total, yet achieves efficiency. (20) 1. An industry has the following cost function: C(X, Y) = 1500+20X+20Y. Market demands for the 2 goods are given by Px = 80 – X, and Py = 140 - 2Y (80 pts.) (a) Define a natural monopoly. Is this industry a natural monopoly? Explain. (10) (b) Find the Ramsey prices at which a monopolist would just break even (make 0 profit). To do this equate X and Y and solve for the best (from a social welfare point of view) common amount of X and Y that pays the firm zero profit. Are these good prices for a regulator to impose? Explain. (20) (c) Should the regulator impose marginal cost pricing? Why or why not? (10) (d) Under the proposal of Loeb and Magat, a regulator would let a monopolist set any price it likes in each market, and transfer the amount of consumer surplus associated with that price to the firm. Since consumer surplus is equal to the area under the demand curve above the product price, determine the prices a profit-maximizing monopolist would set in each market, and the consumer surplus which would be transferred to the monopolist from each market. (20) (e) Suppose instead of the Loeb and Magat scheme the government wished to use two part tariffs in these markets, and suppose further that two part tariffs are feasible. Imagine that there are 10 consumer in each market. Solve for a set of two part tariffs (one for each martket) that pay the firm zero profits in total, yet achieves efficiency. (20)

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a A natural monopoly occurs when it is more efficient for a single firm to produce the entire output of a good or service due to economies of scale Th... View the full answer