Question

Suppose you are a monopoly in the market for a
specific video game. Your demand curve is given by P = 100 - Q / 2,
and your marginal cost curve is Cm = 20. Your fixed costs are $ 300.
a. Graph the demand and the marginal cost curves.
b. Derive and plot the marginal income curve on the
same graphic above.
c. Calculate and indicate on the graph the price and quantity
monopolistic.
d. What is your profit?
e. What is the level of consumer surplus?
f. What would be the level of consumer surplus with a
perfect competition and what is the difference after monopoly?
g. Please give a conclusion and explain your answer in detail.

Answer 1

g) Monopoly market is characterized by presence of a single seller as a result market demand curve and demand curve of monopolist will coincide. Since market demand curve is always negatively sloped. So demand curve of monopolist is also negatively sloped. It means to sell more of output Monopolist will have to reduce price and price is reduced not only for the last unit but it is reduced on all previous units also. Due to this Marginal revenue is less than average revenue for a monopolist whereas in perfect competition Marginal revenue and average revenue will coincide.

* A monopolist produces less than efficient quantity of output as compared to perfect competition. Efficient quantity of output is determined by intersection of demand curve and supply curve. At efficient quantity value to buyer is equal to cost to seller.

* In monopoly price is greater than marginal cost. So efficient quantity is not produced. When monopolist charges price greater than MC then some potential customer who value good more than its MC are unable to purchase goods. This results into inefficiency and it can be measured by Deadweight loss. It is similar to DWL of tax because in monopoly also Total surplus is less as compared to perfect competition.