There are 10 households in Like Wobegon, Minnesota, each with a demand for elect
ID: 1206342 • Letter: T
Question
There are 10 households in Like Wobegon, Minnesota, each with a demand for electricity of Q = 60 - P. Lake Wobegon Electric's (LWE) cost of producing electricity is TC=500 + 2Q. If the regulators of LWE want to make sure that there is no deadweight loss in this market, what price will they force LWE to charge? What will output be in that case? Calculate consumer surplus and LWC's profit with that price. (Round all responses to two decimal places) The regulated price would be $, and the Arm would produce units of electricity. Total consumer surplus would be $, and the firm would cam a $ profit.Explanation / Answer
For 10 homes, the current demand equation being Q = 600 - P and cost function is TC = 500 + 2Q, the MR=MC rule is applied by the monopolist which gives it the profit maximizing quantity:
MR = MC
600 - 2Q = 2
Q = 299, P = 301.
There is a deadweight loss since the monopolist is charging a higher price and lower quantity.
To ensure that there is no deadweight loss, AR = MC rule should be applied
Average revenue AR = Demand curve
AR = MC
600 - Q = 2
Q = 598, P = 2
At a price of $2 firm incurs loss which can be observed as:
Profit = TR - TC
2*598 - (500 + 2*598)
= -$500
Consumre surplus is the area of the triangle so formed between the demand curve and price line.
CS = 1/2*598*(600-2) = $178,802
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