Regulation of monopolies
A monopolist hospital faces the following demand curve for diabetes screening: Pd=100-2Qd where Pd is price of delivery and Qd is the demand for delivery in a hospital. The hospital’s is MC=Q for deliveries and the fixed costs are zero.
Total Revenue = P*Q= (100-2Q) * Q = 100Q – 2Q2
Marginal Revenue = derivative of Total Revenue = 100 – 4Q
Total cost = Integral of Marginal Cost = (1/2)Q2
What is the unregulated price and quantity that the hospital will choose?
Suppose the government wanted to increase access to diabetes screening. What would be the maximum output that could be obtained from the monopoly hospital if government could regulate their price? Assume the government cannot force the hospital to operate at a loss.
What would be the price and quantity regulated if the government decided that the hospital should use marginal cost pricing (ie suppose the government decided they wanted to simulate the quantity that would be produced in a competitive market)? Please draw all three scenarios.