Question

Consider the following information on the production of basketballs. Demand: P = 10 – Q; Marginal Revenue = 10 – 2Q; Marginal Cost = 1 + Q. In a competitive market, what would the price and quantity be? Now assume this is a monopolistic market. What quantity will the monopolist produce? How much will it charge? Again, assume this is a monopolistic market. Calculate the deadweight loss to society (Hint: the area of a triangle is 0.5*B*H, where B = the base of the triangle and H = the height of the triangle).

Answer 1

Competitive market equilibrium occurs at the point where,

P = MC

10 - Q = 1 + Q

2Q = 9

Q = 9 / 2 = 4.5

P =10 - Q = 10 - 4.5 = $5.5

Thus, in a competitive market price is $5.5 and quantity is 4.5

In a monopolistic market equilibrium occurs at the point where,

MR = MC

10 - 2Q = 1 + Q

3Q = 9

Q = 9 / 3 = 3

P = 10 - Q = 10 - 3 = $7

Thus, the monopolist will produce 3 units and charge $7 per unit.

At, Q = 3, MC = 1 + Q = 1 + 3 = $4

Deadweight loss = 0.5[($7 - $4) * (4.5 - 3)] = $2.25