Question

Assume that the market for patio chairs is a monopoly and charges each consumer the same price for patio chairs. producers have the same cost situation:

• The labor and raw material expense of producing additional units of patio chairs for every factory is constant at $10 and equal to average total costs. Assume this is the long run, so fixed costs are equal to zero. Per-period market demand for patio chairs is stable, and described by the data in the following equation: P = 105 – 0.025Q

For each of the following questions, show/explain how you arrived at your answers.


a) Label the intercepts of the demand curve and draw the marginal revenue [MR] curve on the graph below. Write the function for the monopolist’s demand and marginal revenue curve below:   

Answer 1

Demand function is: P = 105 - 0.025Q

Therefore,

Total revenue (R) = P x Q = 105Q - 0.025Q²

Marginal revenue (MR) = dR/dQ = 105 - 0.05Q

Using the demand function:

When Q = 0, P = 105 (Vertical intercept of demand curve) & when P = 0, Q = 105/0.025 = 4200 (Horizontal intercept of demand curve).

Using the MR function,

When Q = 0, MR = 105 (Vertical intercept of MR curve) & when P = 0, Q = 105/0.05 = 2100 (Horizontal intercept of MR curve).

The graph is as follows.