ECON0051 Economics of Regulation Sample Exam Question No. 4 AY2023/24

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ECON0051 Economics of Regulation

Sample Exam Question No. 4

AY2023/24

Question on Topic ëPrice regulation with fully informed regulatorí (related to lecture Week 7)    A monopoly company has the following cost  function:  C(Q) = 15Q + 400, and faces an inverse linear demand function:  P (Q) = 100 - Q.

(a)   Is this company a natural monopoly?  Explain your answer providing a diagram and relevant calculations.

(b)   What is the deadweight loss associated with this monopoly business? Explain your calculations and use diagrams to illustrate your answer where relevant.

(c)   The regulator has decided to mimic the outcome of competition and therefore sets price equal to marginal cost.  Do you think this is a good idea? Why/why not? Use calculations and diagrams to support your answer where relevant.

(d)   What price would you suggest that the regulator sets? Make clear your assumption on the regulatorís objective(s). Explain how the price would be calculated and why it is the best price to use.  Support your answer with calculations, diagrams.