Question

In: Economics

1.A monopolist has a constant MC = 40 per unit produced, has no fixed costs and...

1.A monopolist has a constant MC = 40 per unit produced, has no fixed costs and faces a demand curve of q = 200 – 2P. If the monopolist sells at a single price, which statement is true about the monopolist’s profit-maximising quantity and price? Group of answer choices

q = 120, P = 40 q = 40, P = 80 q = 60, P = 70 q = 40, P = 60 None of the other answers is correct

2

If a firm is currently producing in the elastic part of the demand curve. The firm:

Group of answer choices

A.cannot increase its total revenue further because it is already maximized

B.None of the other answers is correct.

C.can increase its total revenue by shutting down

D.can decrease its total revenue by decreasing the price

E.can decrease its total revenue by increasing the price

Expert Solution

MC = 40

q = 200 – 2P

P = 100 - 0.5q -----------equation 1

Total Revenue (TR) = P*q = (100 - 0.5q)*q = 100q - 0.5q2

Marginal Revenue (MR) = derivative of TR wrt q

MR = 100 - q

At the profit maximizing point, it is true that MR = MC

100 - q = 40

q* = 60

Plug value of q* in equation 1

p = 100 - (0.5*60)

p* = 70

None of the given choices are correct.

Option c. is incorrect because if the monopolist is able to increase the total revenue by producing more, then he will continue doing more production as more output fetches more revenue.

Option D. is incorrect because TR = P*Q. If the price decreases, then the total revenue will rise since the elasticity of demand is elastic and greater than 1. %change in quantity demanded > % change in price

Option E. is incorrect. If the Monopolist lowers the price, then the TR increases. However, an increase in the price will still fetch higher total revenue as it will not have much impact on the quantity demanded of the good.

Option A. is incorrect. Since, monopolist is operating at the elastic portion of the demand, he can increase the total revenue by reducing the good's price.

So, Option B. is correct "None of the other answers is correct."

Rahul Sunny answered 7 months ago

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