Question

In: Economics

Consider a monopolist facing the following situation: Quantity 0 10 20 30 40 50 60 70...

Consider a monopolist facing the following situation:

Quantity 0 10 20 30 40 50 60 70

Price $50 $45 $40 $35 $30 $25 $20 $15

Marginal Revenue $40 $35 $25 $15 $2.5 $2.5 $15

Total Cost $100 $370 $700 $960 $1120 $1225 $1650 $2250

Marginal Cost $27 $35 $26 $16 $11 $43 $60

Average Total Cost $37 $35 $32 $28 $25 $28 $32

A. Graph the following: Demand Curve Marginal Revenue Curve Marginal Cost Curve Average Total Cost Curve

B. Identify the profit maximization point for the monopolist. What are the price and quantities that will maximize profit? What is the total profit received at this point?

C. Suppose you were the regulator of this monopoly and you wished to set price and quantity at the perfectly competitive price and quantity, what would those values be?

D. Compare the results you got in B with the results in C.

Solutions

Expert Solution

(1)

(2)

Profit is maximized at point A where MR intersects MC with Q = 20, P = 40, MR = MC = 35 and ATC = 35.

Profit = Q x (P - ATC) = 20 x (40 - 35) = 20 x 5 = 100

(3)

In perfect competition, P >= MC.

When Q = 50, P > MC but when Q = 60, P < MC.

So profit is maximized when Q = 50, P = 25 and ATC = 25.

(4)

Compared to monopoly, price is lower and output is higher in perfect competition.

Rahul Sunny answered 2 years ago
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