Home » Consider a small, isolated town in which a brewery faces the following inverse demand: P = 15 – 0. The total cost of producing beer is $Q. First…

Consider a small, isolated town in which a brewery faces the following inverse demand: P = 15 – 0. The total cost of producing beer is $Q. First…

Consider a small, isolated town in which a brewery faces the following inverse demand: P = 15 –

0.33Q. The total cost of producing beer is $Q.

a. First assume, the industry is competitive. What quantity will be traded?

b. From now on, assume the brewery is the monopoly. Solve for the brewery’s profitmaximizing

output and price using calculus.

c. Calculate the producer and consumer surplus and the deadweight loss from market power.

d. If it were possible to organize the townsfolk, how much would they be willing to pay the

brewery to sell beer at a price equal to its marginal cost?

e. What is the minimum payment the brewery would be willing to accept to sell beer at a price

equal to marginal cost?

f. Is there potentially a bargain that can be struck between the townsfolk and brewery? What

would the deadweight loss be if such a bargain were struck?

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