You are a monopolist making a durable good, the widget. Some of your customers h
ID: 1201511 • Letter: Y
Question
You are a monopolist making a durable good, the widget. Some of your customers have started to sell their used widgets to others. Assume the used and new widgets are perfect substitutes, but with 2 used equivalent to one new widget.
a) What effect would an increase in cost for new widgets have on the price of new and used widgets?
b) You consider trying to get the used widget market made illegal. If this were done, perfectly, how would it affect your monopoly’s price and profits? Show this graphically, and in words.
Explanation / Answer
a)
With an increase in the cost of new widgets, the market price of new widgets will increase, as producers will shift the entire burden to the consumers in the form of high prices. This will push people to substitute new widgets for used widgets. As a result, demand for used widgets will increase. This will shift the demand curve of used widgets to the right, leading to an increase in its market price as well.
b)
If the used widget market will be made illegal, then the producer of new widgets will once again gain monopoly power in the widgets market. As a result, demand for new widgets would increase and the producer would charge high prices and make positive economic profits.
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