In: Economics
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.
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)