Question

Monopoly

The market demand curve for doodads takes the form QD = (80 – P)/7.

a) Start a Table with doodad quantity ranging from 1 to 10, with the corresponding price in each case. Graph the demand curve.

b) Calculate and add total revenue and marginal revenue, and add the marginal revenue curve to your graph.

c) Is there any way that the monopolist can maximize profit by producing 7 doodads? Explain.

d) Assume that there are no diminishing returns to production, so that variable cost = 17, no matter how much is being produced. How much will the monopolist produce? What will be the profit? What will be the consumer surplus? Show everything on your graph.

e) What will be the monopoly profit if the monopolist can perfectly price discriminate? Will there be any consumer surplus? Indicate on your graph what changes (or, if easier for you, construct a new graph).

f) What will be the consumer surplus if this were instead a competitive market? What about the profit? Explain, and show the result on another new graph.

Answer 1

a and b)

Monopoly outcome
P= 80-7Q
c) At 7 units of production marginal revenue is negative thus at this level of production monopolist is incurring loss due to higher deadweight loss.
d) since the firm is a monopoly market thus its profit-maximizing level of production is where MR=MC (=17).
Thus Q* = 5   
Hence, required profit-maximizing quantity is 5 units and price at this level of production is $45
profit = TR-TC = 225-85 = $140
consumer surplus = ½(73-45)*5 = $70