Microeconomic Theory

Business

Quiz 13 :
Monopoly

bookmark
Unbookmark

Quiz 13 :
Monopoly

The consumer surplus is the difference between market price and the price the consumer wants to pay. The price the consumer wants to pay for any unit is determined through the demand curve. According to the given information in the question img The equation can be rewritten as follows: img For maximum profits, set img . img img Now putting the value of img in the above equation to get img : img Thus, the price is img and the quantity is img . Profit is difference between total revenue and total cost. Calculate profit as follows: img Thus, the profit is img Calculation of consumer surplus as follows: img Thus, the consumer surplus is img According to the information given in the question MC = P which is equal to 5 img Putting img in img img Thus, the price is img and quantity is img The quantity produced at equilibrium level in perfect competition (48) as compared to the monopoly (24) is higher. This is because the monopolist charges the maximum prices which consumers are ready to pay. The entire consumer surplus is taken away by the monopolist. This is not so in the perfectly competitive market. Keep in mind monopolist can only sell higher quantity by lowering the price as its img curve is downward sloping whereas competitive firms MR curve is horizontal and parallel to img - axis. Represent the graph as follows: img The area under deadweight loss is the shaded portion. As the price goes down from $29 to $5, the demand increases from 24 to 48 which is exactly the double of previous quantity. Calculation of consumer surplus as follows: img img Thus, the consumer surplus is img . Calculation the deadweight loss as follows: img Thus, the deadweight loss is img .

a) A monopolist faces a market demand curve given by as follows: img If the monopolist can produce at constant average and marginal costs of AC = MC = 6, the total revenue is given as follows: img Hence the marginal revenue is given as follows: img In monopoly market the equilibrium condition is given as img . That is, img From demand function: img The profit in monopoly market is given as follows: img Therefore, here the profit is given as follows: img The profit-maximizing price-quantity combination for the monopolist is img and img . Also the monopolist's profits are 1024. b) Assume instead that the monopolist has a cost structure where total costs are described by as follows: img Therefore, the average cost is given as follows: img The marginal cost is as follows: img In monopoly market the equilibrium condition is given as img . That is, img From demand function: img The profit in monopoly market is given as follows: img The equilibrium average cost is as follows: img Therefore, here the profit is given as follows: img The profit-maximizing price-quantity combination for the monopolist is img and img . Also the monopolist's profits are 825. c) Assume now that a third cost structure explains the monopolist's position, with total costs given by as follows: img Therefore, the average cost is given as follows: img The marginal cost is as follows: img In monopoly market the equilibrium condition is given as img . That is, img From demand function: img The profit in monopoly market is given as follows: img The equilibrium average cost is as follows: img Therefore, here the profit is given as follows: img The profit-maximizing price-quantity combination for the monopolist is img and img . Also the monopolist's profits are 793.855. d) The market demand curve, the MR curve, and the three marginal cost curves from parts (a), (b), and (c) is giving in the figure 1: img

A single firm monopolizes the entire market for widgets and can produce at constant average and marginal costs of: img Originally, the firm faces a market demand curve given by img a) A monopolist faces a market demand curve given by img If the monopolist can produce at constant average and marginal costs of AC = MC = 10, the total revenue is given as img Hence the marginal revenue is given as img In monopoly market the equilibrium condition is given as img . That is img From demand function we have img The profit in monopoly market is given as img Therefore, here the profit is given as img The profit-maximizing price-quantity combination for the monopolist is img and img . Also the monopolist's profits are 625. b) Now assume that the market demand curve shifts outward (becoming steeper) and is given by: img If the monopolist can produce at constant average and marginal costs of AC = MC = 10, the total revenue is given as img Hence the marginal revenue is given as img In monopoly market the equilibrium condition is given as img . That is img From demand function we have img The profit in monopoly market is given as img Therefore, here the profit is given as img The profit-maximizing price-quantity combination for the monopolist is img and img . Also the monopolist's profits are 800. c) Now assume that the market demand curve shifts outward (becoming steeper) and is given by img If the monopolist can produce at constant average and marginal costs of AC = MC = 10, the total revenue is given as img Hence the marginal revenue is given as img In monopoly market the equilibrium condition is given as img . That is img From demand function we have img The profit in monopoly market is given as img Therefore, here the profit is given as img The profit-maximizing price-quantity combination for the monopolist is img and img . Also the monopolist's profits are 800. d) The graph of the three situations described above is given in the figure below: img With a fixed market demand curve, the supply "curve" for a monopoly will be only one point-namely, that price-quantity combination for which MR = MC. If the demand curve should shift then the marginal revenue curve would also shift, and a new profit maximizing output would be chosen. However, the locus of the series of equilibrium points might have a very strange shape, depending on how the market demand curve's elasticity (and its associated MR curve) changes as the curve is shifted. In this sense the monopoly firm has no well-defined "supply curve." Each demand curve is a unique profit-maximizing opportunity for a monopolist.

There is no answer for this question