Question

Suppose that the market demand is: P = 24 – 3Q, and marginal revenue is: MR = 24 – 6Q. The marginal cost is: MC = 6 and fixed cost is 0.

a. If the market structure is monopoly, determine the profit maximizing price and output for this monopolist and calculate its economic profit or loss at the profit maximizing output.

b. If the market structure is perfect competition, determine the profit maximizing price and total output and calculate a typical firm’s profit or loss at the profit maximizing output.

c. Which market structure is more efficient, i.e., monopoly or perfect competition? Also explain your answer in (c) diagrammatically.

Answer 1

P= 24-3Q

MR = 24 - 6Q , MC = 6 Fixed cost = 0

A) If it's a Monopoly :

The profit maximizing condition for a Monopolist is MC = MR. This implies ; 6 = 24-6Q ==> 6Q = 18 ==> Q = 3

This gives , P = 24-3(3) = 24-9 = 15

Profit of the Monopolist = Total Revenue - Total Cost

= (15)(3) - (6)(3) = 45-18 = 27

Firm makes a profit of 27 units.

B) if it's a perfectly competitive market :

The profit maximizing condition is P= MC ;

This means P= 24-3Q = MC = 6

==> 24-6= 3Q ==> Q= 6

This implies P = 24 - 3(6) = 24-18 =6

Profit = (6)(6) - (6)(6) = 0

Firm makes no profit no loss.

C) which market is more efficient depends upon the total surplus to the society in each case. The market which gives more surplus is more efficient.

Total surplus in perfect competition :

∆ABC represents consumer surplus ( area above price line and below Demand curve). This itself is the total surplus of society as producer surplus is zero.

Total surplus = ∆ABC = 0.5(24-6)(6) = 54

Total surplus in case of Monopoly :

consumer surplus = ∆ABC = 0.5(24-15)(3) = 27/2

Producer surplus = area BCDE = (15-6)(3) = 27

Total surplus = 27+27/2 = 40.5

Since we can see total surplus is greater in case of perfect competition than Monopoly, therefore it is more efficient.