Question

In: Economics

4. Assume a monopoly faces an inverse demand function of p = 150 - 3Q, and...

4. Assume a monopoly faces an inverse demand function of p = 150 - 3Q, and has a constant marginal and average cost of 30.

a. If the monopolist can perfectly discriminate, what is its profit, consumer surplus and total surplus, and what is the deadweight loss of monopoly?

b. If the firm is a single-price monopolist, what is its profit, consumer surplus and total surplus, and what is the deadweight loss of monopoly?

Expert Solution

a) when there is perfect price discrimination the demand curve intersects the marginal cost curve which determine the lowest price offered and the total quantity served. This is because each consumer is charged his or her reservation prices

P = MC

150 - 3Q = 30

Q = 120/3 = 40 units

Consumer surplus = 0

Producer surplus = Profit = 0.5*(150 - 30)*40 = $2400

Total surplus = $2400

DWL = $0

b) Now MR = MC will determine the profit maximizing level of output

150 - 6Q = 30

Q = 120/6 = 20 units

Price P = 150 - 3*20 = $90

Consumer surplus = 0.5*(150 - 90)*20 = $600

Producer surplus = Profit = (90-30)*20 = $1200

Total surplus = 900 + 1200 = $2100

DWL = 0.5*(90-30)*(40-20) = $600

Rahul Sunny answered 2 years ago

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