Question

Consider a monopolist facing the following situation:

Quantity	0	10	20	30	40	50	60	70
Price	$50	$45	$40	$35	$30	$25	$20	$15
Marginal Revenue		$40	$35	$25	$15	$2.5	$2.5	$15
Total Cost	$100	$370	$700	$960	$1120	$1225	$1650	$2250
Marginal Cost		$27	$35	$26	$16	$11	$43	$60
Average Total Cost		$37	$35	$32	$28	$25	$28	$32

A. Graph the following:

Demand Curve

Marginal Revenue Curve

Marginal Cost Curve

Average Total Cost Curve

B. Identify the profit maximization point for the monopolist. What are the price and quantities that will maximize profit? What is the total profit received at this point?

C. Suppose you were the regulator of this monopoly and you wished to set price and quantity at the perfectly competitive price and quantity, what would those values be?

D. Compare the results you got in B with the results in C.

Answer 1

A. From the given table, we can plot Price (or Demand curve), Marginal revenue, Average total cost and Marginal cost curve on the y-axis and quantity Q on the x-axis as shown below in the diagram:

B. Now, profit is maximized at the point where MR intersects MC curve. Here, MR intersects MC at the point where quantity produced is 20 units. Now, at this quantity, price charged by the monopolist on its demand curve is $40.

Now, ATC at 20 units = $35

Then, profit = total revenue - total cost = P*Q - ATC*Q = $40*20 - $35*20 =$100

C. If the market is perfectly competitive, equilibrium is attained at the point where PMC. Here, difference between price and marginal cost is lowest at 20 units.

Thus, price charged is $35 and quantity produced is 20 units.

Profit in a perfectly competitive market is zero.

D. Price charged by the firm when it is under monopoly is $40 but price charged by the firm under perfect competition is $35.