Question

Suppose a monopolist faces a market demand curve Q= 120 - 2p. a. If marginal cost is constant and equal to zero, what is the magnitude of the welfare loss? b. If marginal cost increases to MC= 10, does welfare loss increase or decrease? Use a graph to explain your answer.

Answer 1

Demand= 120-2p

In monopoly, If MR=MC then their is profit maximization

MR = derivatite of Demand function with respect to p

a) MR= d/dp (120-2p)

=0-2 = -2

so MR= -2 and MC=0 (given)

so the monopolist's magnitude of welfare loss is 2

b) Now MC= 10

MR= -2

Profit= MR-MC = -2 - 10 = -12, so magnitude of welfare loss increases to 12 from 2.