Question

For Limit Pricing: Demand Function P = 200 – Q Monopolist Cost Structure MC = AC = 40. Potential Entrant’s Cost Structure MC = AC = 60.

Calculate the Monopolist Profits not limit pricing and Monopolist Profits if it limit prices.

Answer 1

If monopolist not limit price, then he produce at MR = MC

MR = 200 - 2Q [ As marginal recenue has double slope of price line ]

200 - 2Q = 40

200 -40 = 2Q

Q = 80

P = 200-80 = $120

Profit = (P-ATC)*Q

= (120 - 40)*80

= $6400

If he limit price

( Price limiting means he reduce the price at such level so that the entrant was not able to enter, as it is given that the entrant MC = 60 so the monopolist will reduce the price to somewhere less than 60 ( let say 59.5) so he will not able to enter)

So he put price = 59.5

P = 59.5 so,

59.5 = 200-Q

Q = 140.5

So, Profit = (P-ATC)*Q

= (59.5-40)*140.5

= $2739.75 = 2740 ( approximatley)