Question

The following table shows the demand for a product produced by a monopolist , who has a constant marginal cost and an average total cost of $45 per unit

Quantity (Thousand of units) 0 1 2 3 4 5 6

Price (Dollars per unit ) 120 105 90 75 60 45 30

A. Calculate the total revenue and marginal revenue for each level of quantity

B What are the profit-maximizing level of output and the price of the product

C Calculate the monopolist's profit

D Calculate the Lerner Index for this industry

Answer 1

a)

Total Revenue = Price * quantity

Marginal Revenue is the increase in total revenue when one more unit is sold.

b)

The monopolist profit maximizing level required MR = MC. We have MC = 45. Thus at Q = 3, MR = MC = 45. Hence Q = 3 and P = 75 is the equilibrium.

c)

Profit = Total Revenue - Total Cost = 75*3 - 45*3 = 900

d)

Lerner index = P-MC/P = 75-45/75 = 30/75 = 0.4