A profit-maximizing monopolist operates with an inverse demand curve P = 20 − Q and an associated marginal revenue MR = 20 − 2Q.

A profit-maximizing monopolist operates with an inverse demand curve P = 20 − Q and an associated marginal revenue MR = 20 − 2Q. Marginal cost of production is constant at MC = 4. Assume they have to sell each unit of output for the same price.

a) Find the monopolist’s optimal choice of output and the socially efficient output.

b) Sketch demand, marginal revenue, and marginal cost. Indicate on your diagram the points you found in part a).

c) What is the amount of deadweight loss at the monopolist’s optimal choice? If a buyer is willing to pay more than marginal cost for the next unit beyond the monopolist’s choice of output, why doesn’t the monopolist choose to produce and sell that unit?

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Expert Solution

Rahul Sunny answered 1 year ago

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