P-MC_85-6=0.294 8.5 Profits AC=MC MR D=AR 2 4 6 8 10 29 Figure 10.11.a b.A government regulatory agency sets a price ceiling of $7 per unit.What quantity wil be prod ed,and what will the firm's profit be?What happens to the degree ofmonopoly power? Todetermine the effect of the price ceilingon the quantity produced,substitute the ceiling price into the demand equation. 7=11.Q.0r Q=4,000. The monopolist will pick the price of $7 because it is the highest price that it can charge,and this price is still greater than the constant marginal cost of $6.resulting in positive monopoly profit. Profits are equal to total revenue minus total cost π=704.000).(G4.000)=$4,000 The degree of monopoly power is: P-MC-7-6=0148 c.What price ceiling yields the largest level of output?What is that level of output?What is the firm's degree of monopoly power at this price? If the regulatory authority sets a price bebw $6,the monopolist would prefer to go out of business instead of produce because it cannot cover its average costs.At any price above $6.the monopolist would produce less than the 5.000 units that gulator agency set a price ceiing of6. ing the opolist effective demand curve up to Q=5.000.To ensure a positive output(so that the P MC P − = − = 8 5 6 8 5 0 294 . . . . Price Q 2 4 6 8 12 2 4 6 10 12 10 8 AC = MC MR D = AR Profits Figure 10.11.a b. A government regulatory agency sets a price ceiling of $7 per unit. What quantity will be produced, and what will the firm’s profit be? What happens to the degree of monopoly power? To determine the effect of the price ceiling on the quantity produced, substitute the ceiling price into the demand equation. 7 = 11 - Q, or Q = 4,000. The monopolist will pick the price of $7 because it is the highest price that it can charge, and this price is still greater than the constant marginal cost of $6, resulting in positive monopoly profit. Profits are equal to total revenue minus total cost:  = (7)(4,000) - (6)(4,000) = $4,000. The degree of monopoly power is: P MC P − = − = 7 6 7 0.143. c. What price ceiling yields the largest level of output? What is that level of output? What is the firm’s degree of monopoly power at this price? If the regulatory authority sets a price below $6, the monopolist would prefer to go out of business instead of produce because it cannot cover its average costs. At any price above $6, the monopolist would produce less than the 5,000 units that would be produced in a competitive industry. Therefore, the regulatory agency should set a price ceiling of $6, thus making the monopolist face a horizontal effective demand curve up to Q = 5,000. To ensure a positive output (so that the