A monopolist with a constant marginal cost of production of 10 maximizes its profit by choosing...

A monopolist with a constant marginal cost of production of 10 maximizes its profit by choosing to produce where the price elasticity of demand is –3. (Recall that MR = p(1 + 1/ε) where MR is marginal revenue, p is price and ε is the point price elasticity of demand.)

A. If price is decreased (from its profit maximizing level) by a small amount, revenue of the monopolist will increase.

B. If the monopolist’s fixed cost increases, its profit maximizing price also increases.

C. The price set by the monopolist is equal to 30.

D.Since marginal cost is constant, both profit-maximizing and revenue-maximizing quantities are equal.

Thank you for your help! (Please show process)

Expert Solution

Option (A) is correct.

Using Lerner Index,

- 1 / Elasticity = (P - MC) / P

- 1 / -3 = (P - 10) / P

1/3 = (P - 10) / P

P = 3P - 30

2P = 30

P = 15

Since absolute value of elasticity is higher than 1, demand is elastic. With elastic demand, a decrease in price increases revenue.

However, revenue-maximizing and profit-maximizing price-output bundles are different, and change in fixed cost does not influence the profit-maximizing price-output bundle obtained using MR = MC.

Rahul Sunny answered 2 years ago

A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist...

A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost. true or false Price discrimination is a rational strategy for a profit-maximizing monopolist when there is no opportunity for customers to engage in arbitrage across market segmentations true or false When regulating a monopoly with average cost pricing, the monopoly is able to enjoy a zero economic profit and the deadweight loss of...

A monopolist (Firm 1) may be a low-cost type, with constant marginal cost of production 10,...

A monopolist (Firm 1) may be a low-cost type, with constant marginal cost of production 10, or a high-cost type, with constant marginal cost of 20, with probabilities p and 1-p respectively. It has no fixed cost. Only the monopolist knows his type. The game has two stages. In stage one, a potential entrant (Firm 2) with constant marginal cost of 15 decides whether to enter the market. Entry requires a fixed investment of $100. If Firm 2 enters the...

A monopolist: Maximizes profit at the output where price equals marginal cost. Charges a higher price...

A monopolist: Maximizes profit at the output where price equals marginal cost. Charges a higher price than a competitive firm, ceteris paribus. Is a price taker since it has market power. Cannot earn an economic profit in the long run.

A monopolist in Ba can produce at constant marginal cost of MC = 10. The monopolist...

A monopolist in Ba can produce at constant marginal cost of MC = 10. The monopolist faces a market demand curve given by Q = 50 - P. You can assume that average cost is same as marginal cost. a) Calculate the profit-maximizing price-quantity combination for the monopolist. b) Compute the monopolist’s profits and consumer surplus. c) What output level would be produced by this industry under perfect competition? d) Calculate the consumer surplus obtained by consumers under perfect competition....

Suppose that a monopolist has a constant average total cost of production and marginal cost of...

Suppose that a monopolist has a constant average total cost of production and marginal cost of production equal to $6, and has a demand for its product represented as price quantity bought and sold (units) $10 1 $9 2 $8 3 $7 4 $6 5 Calculate the total and marginal revenue for each quantity produced and sold Find the profit-maximizing (optimal) quantity produced and sold and the price/unit. Calculate the profit or loss at the optimal quantity of production and...

41. A monopolist has a constant marginal and average cost of $10 and faces a demand...

41. A monopolist has a constant marginal and average cost of $10 and faces a demand curve of QD = 1000 – 10P. Marginal revenue is given by MR = 100 – 1/5Q. a. Calculate the monopolist’s profit-maximizing quantity, price, and profit. b. Now suppose that the monopolist fears entry, but thinks that other firms could produce the product at a cost of $14 per unit (constant marginal and average cost) and that many firms could potentially enter. How could...

Consider a monopolist facing a constant marginal cost of MC = $10 per unit and a...

Consider a monopolist facing a constant marginal cost of MC = $10 per unit and a demand curve of P = 200 – 2q for each individual consumer. If the monopolist has zero fixed costs, what are its profit and the resulting deadweight loss? How does your answer change if the monopolist also has a fixed cost of $4000? b. Now the monopolist faces a potential competitor. If the consumer switches to buy the product from the entrant the consumer...

1.A monopolist maximizes profit at the output rate where its total revenue equals total cost. True...

1.A monopolist maximizes profit at the output rate where its total revenue equals total cost. True False 2. To maximize profit, the perfectly competitive firm charges a price equal to __________ while the monopolist charges a price __________. marginal revenue; equal to marginal cost marginal cost; greater than marginal cost marginal revenue; less than marginal revenue average total cost; greater than average total cost 3.Compared to the perfectly competitive firm, the monopolist faces a demand curve that is ___________________ elastic...

A monopolist sells in two states and has constant marginal cost MC =10. Demand in market...

A monopolist sells in two states and has constant marginal cost MC =10. Demand in market 1 is Q1 = 50- p1. Market 2 demand is Q2 = 90-1.5p2. a) If the monopolist is unable to discriminate price, what would be the profit maximizing price and quantity? b) If the monopolist can discriminate price between two states, what would the price and quantity in each market? c) Calculate the demand elasticity of each market and explain the price strategy.

A monopolist produces gizmos at constant marginal cost of 4 and no fixed cost. It recognizes...

A monopolist produces gizmos at constant marginal cost of 4 and no fixed cost. It recognizes that it has two types of customers. The demand curve of each type of customer is given by: Type-1 customer: ( ) p1 q1 = 18 − 2q1 Type-2 customer: ( ) p2 q2 =15 − q2 where qi (i = 1, 2) are the quantity demanded of type i consumer per period. While the monopolist knows the demand curves, it cannot identify the...

Question