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In: Economics

.  Suppose a monopoly faces inverse market demand P = 600 – 0.01Q, and that the firm’s...

.  Suppose a monopoly faces inverse market demand P = 600 – 0.01Q, and that the firm’s total cost curve is C = 2,500,000 + 10Q + 0.015Q2.

  1. Find the firm’s profit-maximizing price and output PM, QMand sketch the equilibrium.  
  2. Find the firm’s ATC formula.  What is the ATC at the output level you found in part a?
  3. Add the ATC to your graph and indicate the firm’s profit.  What is the total profit?
  4. What is the per unit profit at QM?  Explain why it does not make sense to produce more output when the average cost is so far below the price at QM.
  5. Find the firm’s Lerner index at PM, QM. What does the number tell you?
  6. Suppose the government levies an 8% tax on profits.  Does this tax alter the monopoly’s price-output choice? Explain why or why not.

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Expert Solution

Rahul Sunny answered 8 months ago
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