Suppose you have the following data: Market demand is P = 250 – 5Q

Suppose you have the following data:

Market demand is P = 250 – 5Q

Total Cost Function is TC = 100 + 5Q+ 3Q2

a) If this market has only one firm (monopoly), compute the quantity, price and profit of this firm. Compute PS.

b) If this market had many firms (Perfect Competition), compute competitive market output, price, and profit. Compute TS.

c). Illustrate your answers in (a) and (b) on the same graph. Your graph should include the demand curve, the MR curve, and the MC curve, and the equilibrium prices and quantities On this graph, show DWL of a monopoly. Compute the DWL of a monopoly. Explain why a monopoly results in deadweight loss.

Solutions

Expert Solution

Monopoly have deadweight loss because they do not operate at competitive equilibrium. Because of the higher prices charged by Monopoly and less quantity produced, some of the surpluses are foregone. These results into deadweight losses.

Rahul Sunny answered 1 year ago

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