The industry demand function for bulk plastics is represented by the following equation:
P = 800 − 20Q
Where Q represents millions of pounds of plastic.
The total cost function for the industry, exclusive of a required return on invested capital, is
TC = 300 + 500Q + 10Q2
Where Q represents millions of pounds of plastic.
a. If this industry acts like a monopolist in the determination of price and output, compute the profit-maximizing level of price and output.
b. What are total profits at this price and output level?
c. Assume that this industry is composed of many (500) small firms, such that the demand function facing any individual firm is P = $620
Compute the profit-maximizing level of price and output under these conditions (the industry’s total cost function remains unchanged).
d. What are total profits, given your answer to Part (c)?
e. Because of the risk of this industry, investors require a 15 percent rate of return on investment. Total industry investment amounts to $2 billion. If the monopoly solution prevails, as calculated in Parts (a) and (b), how would you describe the profits of the industry?
f. If the competitive solution most accurately describes the industry, is the industry operating under equilibrium conditions? Why or why not? What would you expect to happen?
g. The Clean Water Coalition proposed pollution control standards for the industry that would change the industry cost curve to the following:
TC = 400 + 560Q + 10Q2
What is the impact of this change on price, output, and total profits under the monopoly solution?
h. Assume these standards are being proposed only in the state of Texas, which has 50 of the 500 producers. What impact would you expect the new standards to have on Texas firms? The rest of the industry?