ControlSoft, Inc. is a supplier of inventory management and control software that is popular with companies in the US. The company has retained a consulting firm to provide advice concerning demand and supply conditions in the industry. Using government data, the consultant estimates market supply and demand conditions as follows: Qs = 4000P and Qd = 1,500,000 – 2000P.
a) Assuming the industry is perfectly competitive, calculate the domestic equilibrium price and output combination.
b) Now assume that ControlSoft lobbies for and obtains import restrictions which eliminate their leading competitors, giving them a monopoly in the domestic market. Based on the same demand and supply conditions above, calculate the new equilibrium price and output combination. For this problem assume that TR = 750Q – 0.0005Q2 and MR = 750 – 0.001Q, while the industry supply curve now represents their marginal cost curve since the firm is now a monopoly. Note: You will need to rewrite the supply equation in terms of price to get their marginal cost curve.
c) Is the outcome in part B desirable from society’s viewpoint? Explain.
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