Question

Happy Tire is the owner of all the tire stores in Capitol City. The market demand curve for a set of tires is:

P = 300 – Qd

The marginal revenue curve associated with this demand curve is:

MR = 300-2Q

The firm face costs of:

TC = 150Q + 0.5Q2

MC = 150 + Q

The Capitol City council needs help to determine if they should regulate Happy Tire.

a.Calculate the unregulated price of tires in Capitol City.

b.The owner of Happy Tires argues that he charges "about the same" as competitive price. Is this true?

c.One city councilman suggests that, "It is fair to allow Happy Tire to charge the average cost of tires." Calculate the price and quantity of tires sold under P=AC regulation.

d.Is the councilman’s proposal Pareto Efficient or Pareto Superior?

Answer 1

a. The unregulated price of tires in Capitol City is $300. b. The owner of Happy Tires charges a higher price than the competitive price. c. Under AC regulation, the price of tires would be $150 and the quantity sold would be 75. d. The councilman's proposal is Pareto Efficient.

Step-by-step explanation:

a. To calculate the unregulated price of tires in Capitol City, we set the quantity demanded (Qd) equal to zero and solve for price (P). Therefore, we have:

300 - Qd = P

300 - 0 = P

P = 300

So, the unregulated price of tires in Capitol City is $300.

b. The owner of Happy Tires argues that he charges 'about the same' as the competitive price. However, in a perfectly competitive market, the price is determined by the intersection of the demand and supply curves, and the marginal cost should equal the price. In this case, Happy Tires charges a higher price than the competitive price.

c. If Happy Tires were to charge the average cost of tires (AC), we can set the average cost equal to the price and solve for quantity:

P = AC

300 - Qd = 150 + Qd

2Qd = 150

Qd = 75

Therefore, the price of tires under AC regulation would be $150 and the quantity sold would be 75.

d. The councilman's proposal to set the price equal to the average cost (P=AC) is Pareto Efficient because it maximizes social welfare by setting a price that is fair to both the firm and the consumers.