Question

The following table shows the demand curve facing a monopolist who
produces at a constant marginal cost of $10:

Price Quantity
18 0
16 4
14 8
12 12
10 16
8 20
6 24
4 28
2 32
0 36

a) Calculate the firm’s marginal revenue curve.
b) What are the firm’s profit-maximizing output and price? What is its profit?
c) What would the equilibrium price and quantity be in a competitive industry?
d) What would the social gain be if this monopolist were forced to produce and price at the
competitive equilibrium? Who would gain and lose as a result? Illustrate the difference
between the competitive and monopolistic outcomes in a graph.

Answer 1

TR=P*Q

MC=10

PROFIT = TR-TC

P	Q	TR	MR	MC	TC	PROFIT
18	0	0		10	10	-10
16	4	64	16	10	40	24
14	8	112	12	10	80	32
12	12	144	8	10	120	24
10	16	160	4	10	160	0
8	20	160	0	10	200	-40
6	24	144	-4	10	240	-96
4	28	112	-8	10	280	-168
2	32	64	-12	10	320	-256
0	36	0	-16	10	360	-360

a) MR = change in TR/change in Q

b) setting MC=MR, the firm will produce Q = 8 units at P = 14

c) The competitive firm will set P=MC and produce Q = 16 units at P = 10

d) Social gain = loss in surplus = 0.5*(16-8)*(14-10) = 16