In: Economics
Given the inverse demand function of monopoly is: ?(?) = ??? − ?
the cost
? function of the monopoly is: ?(?) = ?? + ?? .
(i) Find the profit maximizing price and output level of monopoly
and the amount of profit.
(ii) Now assume that the same inverse demand function and cost
function are faced by a competitive market. Find the profit
maximizing price and output level of competitive market and the
amount of profit.
(iii) Calculate the consumer surplus, producer surplus and
deadweight loss due to monopoly.
(iv) Assume that government imposes the monopoly a lump-sum tax of
? = $??? on total profit. How does the tax affect the profit of the
monopoly?
i)
Demand function is given by
P=100-Q
Total Revenue=TR=P*Q=(100-Q)*Q=100Q-Q2
Marginal Revenue=MR=dTR/dQ=100-2Q
Cost function is given by
C=10+4Q
Marginal Cost=MC=dC/dQ=4
Set MR=MC for profit maximization
100-2Q=4
Q*=48
P*=100-Q=100-48=$52
Total Revenue=TR=P*Q=48*52=$2496
Total Cost=TC=10+4Q=10+4*48=$202
Optimal Profit=TR-TC=2496-202=$2294
ii)
In case of perfect competitive firm, Set MC=P for profit maximization
4=100-Q
Q*=96
P=MC=$4
Total Revenue=TR=P*Q=4*96=$384
Total Cost=TC=10+4Q=10+4*96=$394
Optimal Profit=TR-TC=384-394=-$10
iii)
Q | P=100-Q | MR=100-2Q | MC |
0 | 100 | 100 | 4 |
20 | 80 | 60 | 4 |
40 | 60 | 20 | 4 |
48 | 52 | 4 | 4 |
60 | 40 | -20 | 4 |
80 | 20 | -60 | 4 |
96 | 4 | -92 | 4 |
100 | 0 | -100 | 4 |
In case of Monopoly,
Consumer surplus is are below demand curve but above price line. So,
CS=1/2*(100-52)*48=$1152
Producer surplus is are above MC curve but below price line. So,
PS=(52-4)*48=$2304
Dead weight loss=1/2*(52-4)*(96-48)=$1152
iv)
Lump Sum Tax of $200 will increase the fixed cost. MC of firm remains unchanged. Hence optimal output and price remains unchanged. But, profit will decline by $200.