. John Gardener is the city planner in a medium-sized southeastern city. The cit
ID: 1116109 • Letter: #
Question
. John Gardener is the city planner in a medium-sized southeastern city. The city is considering a proposal to award an exclusive contract to Clear Vision, Inc. a cable television carrier. Mr. Gardener hired an economist to generate the demand, marginal revenue, total cost, and marginal cost given below: P- 28-.0008* Q TC = 120,000 + .0006 * MR=28-.00 16 * Q MC = .0012 * Q Use this information to answer the following questions: a. What price and quantity would be expected if the cable company is allowed to operate without any government regulation? b. Mr. Gardener has asked you to recommend a price and quantity that would be socially efficient. Recommend a price and quantity to Mr. Gardener using economic theory to justify your answer. c. Compare the economic efficiency implications of the answer to part a with the answer to part b. Which equilibrium is better for society? Draw a graph illustrating the two equilibria and label the deadweight loss created by the less efficient equilibrium.Explanation / Answer
P: Price
a. Without regulation we would expect the firm to behave as a monopolist, equating MR and MC.
MR = 28 0.0016Q
MC = 0.0012Q
28 0.0016Q = 0.0012Q
0.0012Q + 0.0016Q = 28
0.0028Q = 28
Q =
Q = 10,000
10,000 Cable Subscribers
P = 28 - 0.0008(10,000)
P = 20
$20 per month
b. Economic theory suggests that price should be equal to MC to achieve allocative efficiency.
P = 28 - 0.0008Q
MC = 0.0012Q
28 - 0.0008Q = 0.0012Q
28 = 0.002Q
Q = 14,000
14,000 Cable Subscribers
P = 28 - 0.0008(14,000)
P = 28 - 11.20
P = 16.80
$16.80 per month
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