Monopolistic firm faces the inverse demand function p = 250 – 6Q. Firm’s total cost of...

Monopolistic firm faces the inverse demand function p = 250 – 6Q. Firm’s total cost of production is C = 1250 + 10Q + 8Q² :

1. Create a spreadsheet for Q = 1 to Q = 20 in increments of 1. Determine the profit-maximizing output and price for the firm and the consequent level of profit.

2. Will the firm continue the production at the profit-maximizing level of output? Show why or why not?

3. Calculate the Lerner Index of monopoly power for each output level and verify its relationship with the value of the price elasticity of demand at the profit-maximizing level of output.

4. Suppose that a specific tax of 10 per unit is imposed on the monopoly. What is the effect on the monopoly’s profit-maximizing price?

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Expert Solution

Rahul Sunny answered 1 year ago

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