Question

1. Suppose you have the following information for a monopoly

Quantity (millions)	Price	Total Cost
1	50	20
2	45	25
3	40	30
4	35	35
5	30	40
6	25	45
7	20	50
8	15	55
9	10	60
10	5	65

(a) Given the data in the table, graphically show the monopoly's profit maximization position.

(b) What output and what price do you predict the monopoly will choose?

(c) Does the monopoly produce at the socially optimal level? Show any inefficiency on your graph.

(d) To improve market efficiency, the government is considering subsidizing the monopoly's production. How much should the subsidy be and how can this subsidy improve market efficiency

Answer 1

Q	P	TR	MR
1	50	50	-
2	45	90	40
3	40	120	30
4	35	140	20
5	30	150	10
6	25	150	0
7	20	140	-10
8	15	120	-20
9	10	90	-30
10	5	50	-40

a. Marginal cost= change in TC/Change in quantity= $5

Monopoly produces at MC=MR

b. Monopolist profit maximising price=$27.5

Profit maximising quantity=5.5

c. No, monopolist doesn't produce at socially optimal level.

Socially optimal level is at P=MC. Socially optimal output level is Q= 10.

d. Subsidy is equal to the loss of monopolist to produce at a socially optimal level.

Socially optimal level Q=10.

When Q=10, ATC= 65/10=6.5, P=MC=5

Subsidy= loss= (6.5-5)*10= $5