Question

1. Suppose a monopolist has constant (average and marginal cost of AC = MC = 8) and faces demand such that Q_D = 100 - P.                                                                                                                     

1. Derive MR curve

(hint: you can calculate TR with Demand curve, then you can drive MR from TR)

2. Calculate a monopolist’s profit-maximizing Quantity and Price
3. Calculate the equilibrium Price and Quantity in the perfectly competitive market
4. Draw all curves (Demand, MR, and MC curves)
5. Calculate Monopoly Profit and Dead Weight Loss (DWL).
6. Comparing the profit-maximizing process and welfare b/w two markets (competitive market and monopoly market) explaining main reason drive these differences and implications from it.

Answer 1

Qd=100-p

P=100-Qd

P*Qd=TR=100Qd-Qd2

MR=100-2Qd{derivative of TR with respect to Qd}

Equilibrium of monopolist is at where MR=MC,

MC=8

MR=100-2Qd

100-2Qd=8

2Qd=92

Qd=46

P=100-46=54

In competitive market equilibrium is at where market supply is equal to market demand.supply function is nothing but MC function of producer.because MC is constant then,

Supply function,

P=8

P=100-Qd(demand function)

100-Qd=8

Qd=92

P=100-92=8

Monopoly profit=(P-mc)*Q=(54-8)*46=2116

Deadweight loss=0.5* equilibrium quantity difference between monopoly and perfect competitive*price difference

=0.5*(92-46)*(54-8)=0.5*46*46=1058

In monopoly the profit maximization process is done by the condition. MR=MC and the firm decide price itself.

In perfect competition industry determine the price by market demand and supply.then firms choose what QUANTITY to sell at that price in order to maximize their profit.

The perfect competition has maximum welfare or social surplus possible.it is most efficient market that gives the most welfare to society.

Monopoly is least EFFICIENT market .it has deadweight loss or in order words loss of welfare, that can be achieved in perfect competition.

Reason and implications

i) market power: monopoly firm have market power because it is only firm in the market that enable it to charge explicitly high prices than perfect competition ,that doesn't have any market power because there are very large numbers of sellers in the market.{ By market power means by changing supply firm's ability to change price}.

ii)product: the monopoly product have no close substitute which finishes the competition for him so he charges higher prices.on other hand in perfect competition each firm produces identical goods that are perfect substitue to each other that makes each firm to charge same lower price.