ECO404 Managerial Economics Assignment 2 Solution Spring 2013

Monopoly is a market structure in which a single seller is dominating and selling a
unique product for which no close substitutes are available in the market. One major example from Pakistan may include public monopolies set up by government to provide essential public goods and services such as water and electricity. Electricity in Pakistan is generated, transmitted, distributed and retail supplied by two vertically integrated public sector utilities: Water and Power Development Authority (WAPDA) for all of Pakistan except Karachi, and the Karachi Electric Supply Corporation (KESC) for the city of Karachi and its surrounding areas. The Pakistan Water and Power Development Authority (WAPDA) was established through an act of parliament in February 1958 for integrated and rapid development and maintenance of water and power resources of the country. This includes controlling soil salinity and water logging to rehabilitate the affected land in order to strengthen the predominantly agricultural economy of the country. Recently, a study was conducted on WAPDA by an economist who revealed the following hypothetical graphical results of short run equilibrium, long run equilibrium
and deadweight loss of WAPDA. He further concluded in his final remarks that
WAPDA, being a monopoly market, creates a loss in social welfare due to the decline in mutually beneficial trade activity and due to the wealth transfer problem, consumer surplus is transferred to producer surplus.


Being a student of Managerial Economics, carefully analyze above graphs and calculate the following for WAPDA:

A. Short Run Profit
B. Long Run Profit
C. Consumer Deadweight Loss
D. Producer Deadweight Loss
E. Total Deadweight Loss
F. Amount of Consumer Surplus that is transferred to Producer Surplus
(Marking Scheme: 3+3+4+4+3+3)
Outcomes of the study:
After solving this assignment, student will be able to:
 Know about short run and long run equilibrium of Monopoly market structure
 Calculate short run and long run profit with the help of graph
 Know about Deadweight loss of monopoly
 Calculate consumer and producer deadweight loss of monopoly