Monopoly and output (allocative) efficiency

The diagram to the right initially represents market demand and supply for a competitive industry. The supply curve represents the horizontal sum of the individual firms' marginal cost curves. (Ignore the MR curve for now.) The inverse demand equation is: P = 240 - 2Q.

Part 1: Unregulated monopoly:

Complete the following table contrasting the situations under competition and monopoly:

	(1)	(2)	(3)
	Competition	Monopoly	Change (2)-(1)
Consumer surplus
Producer surplus
Combined (market) surplus

In the diagram, use the pattern "///" to shade in the the welfare (deadweight) loss caused by the monopoly.

Part 2: Regulated monopoly: Now suppose that there is a price ceiling set for the monopoly at a price of $160. The price ceiling changes the price and marginal revenue situation faced by the monopolist.

Complete the following table:

	Q < or = 40	Q > 40
Price:		P = 240 - 2Q
MR:		MR = 240 - 4Q

	b.	Add the price ceiling to your diagram, and highlight the new MR curve faced by the monopolist.
	c.	Given the price ceiling: --How much output would the monopolist choose to maximize its profits? ______ --In the diagram (1) indicate the new output level and (2) use the pattern "\\\" to shade in the new welfare loss.
	d.	What output level would the monopolist choose with a price ceiling of $130? ______ --Is the welfare loss >, <, or = the welfare loss with the price ceiling of $160? ______
	e.	What level of price ceiling would achieve output efficiency? ______