Question

1. Suppose that a monopoly faces the demand, marginal revenue, and cost schedules below.

Quantity	Price	Marginal Revenue	Marginal Cost	Average Total Cost
1	230	230	100	150
2	210	190	100	125
3	190	150	100	116.6666667
4	170	110	100	112.5
5	150	70	100	110
6	130	30	100	108.3333333
7	110	-10	100	107.1428571
8	90	-50	100	106.25
9	70	-90	100	105.5555556
10	50	-130	100	105

1. What quantity maximizes profit?
   
   The monopoly Q = ____
   
2. What price maximizes profit?
   
   The monopoly P = ____
   
3. What is the maximum profit?
   
   The maximum profit is $____________.
   
4. What is the socially efficient quantity?
   
   The socially efficient Q = _____

What is the deadweight loss when the monopoly produces the monopoly Q instead of the socially efficient Q?

The deadweight loss = $_______

Answer 1

Quantity	Price	Marginal revenue	Marginal cost	Average total cost	total cost	Total revenue	Profit
1	230	230	100	150	150	230	80
2	210	190	100	125	250	420	170
3	190	150	100	116.66	349.98	570	220.02
4	170	110	100	112.7	450.8	680	229.2
5	150	70	100	110	550	750	200
6	130	30	100	108.33	649.98	780	130.02
7	110	-10	100	107.14	749.98	770	20.02
8	90	-50	100	106.25	850	720	-130
9	70	-90	100	105.55	949.95	630	-319.95
10	50	-130	100	105	1050	500	-550

Total revenue= price*Quantity

Marginal revenue= Total revenue of nth unit- total revenue of n-1th of unit

Total cost= Average cost*quantity

profit- total revenue-total cost

a. Monopolist maximises profit when its marginal cost=marginal revenue

The output corresponding to where MC=MR are equilibrium quantity. From the schedule above we can understate that MC and MR approximately equal when it sells 4 units of output. When it sells 4 units of output it earns maximum profit.

b Monopolist maximises profit when its marginal cost=marginal revenue. The price corresponding to where MC=MR are equilibrium price. rom the schedule above we can understate that MC and MR approximately equal when it sells 4 units of output at Rs 170 per unit.

c. When firm is in equilibrium it earns maximum profit. ie 229.2

d. Socially efficient quantity is obtained when firm sells output corresponding to the point where AR=MC. Ie firm is selling output corresponding to P=MC. At such point the price consumer pays is equal to the marginal benefit it receives.

From the figure drawn above we can understand when MC=AR, corresponding output is 7.5 units.

e. Dead weight loss is the gain which neither gained by consumer or producer. It is loss for the soceity. Dead weight loss occur in the case imperfect competittion where demand curve is downward sloping.

In the present case dead weight loss is represented approximately by the area of triangle ABC.

Base= 7.5-4 ( socially optimum output-Monopoly output)

Height= 170-100 (monopoly price- competitive price)

Dead weight loss=

=122.5