How many gadgets will you end up producing

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Reference no: EM133800038

Homework: Slack & Monopoly- Government Policy towards Business

Description

All questions require explanations/calculations. Without any of them, any answer is worthless. Your answers must be written legibly. If I cannot read your answers, I cannot give you credit for them. I expect to see neatly drawn diagrams, with labeled axis, intercepts, point of interest (and coordinates), areas of interest, etc.... Where should be straight lines I expect to see straight lines, so use a ruler.

Jack is the Minister of Gadgetry, which is charge of producing gadgets. The marginal benefit of gadgets is given by the equation MB = 100 - Q, and this is all Jack knows about gadgets. He does not know anything about the production of gadgets.

Question I

You are the Deputy Minister of Gadgetry, Jack's top bureaucrat. Like Jack you know the marginal benefit of gadgets, but you also know that the marginal cost of production is a constant $10 per gadget.

Suppose that you propose to produce 60 gadgets at a total cost of $4000. Do you think Jack would accept your proposal?

If Jack accepts your proposal, how much slack have you created for yourself? Answer with numbers, and also illustrate the slack in a proper diagram.

Question II

What proposal would maximize the slack?

Question III

What if gadgets are produced by a monopolist instead? How much would the monopolist produce and at what price? What is the profit of the monopolist? Answer with numbers, and also illustrate the profit in a proper diagram.

Question IV

Let us go back to the case in which gadgets are produced only by the Ministry. Let us also suppose that Jack is a little bit more sophisticated. Jack still does not know anything about production of gadgets but he asks you about the marginal cost of production. Based on your marginal cost report (which does not have to be the real $10; since Jack knows nothing about production of gadgets, you can safely lie to Jack) Jack can figure the socially optimal quantity of gadgets, and will ask you to produce that quantity.

Suppose you tell Jack that the marginal cost of production is $40. How many gadgets will you end up producing and how much slack do you obtain? Answer with numbers, and also illustrate the slack in a proper diagram.

Question V

What should you report to Jack about the marginal cost? Remember, you are a bureaucrat interested in maximizing slack. Answer with numbers, and also illustrate the slack in a proper diagram.

Reference no: EM133800038

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