Question

costs? II IOL I0 4. Suppose DD Inc is a monopolist with C-100-5Q+Q2 and demand is P-55-20. (a) What price should DD set to maximize profits? What is the profit maximizing level of output? How much profit and consumer surplus does DD generate? (b) What would output be if DD acted like a perfect competitor and set MC-P. What profit and consumer surplus would be generated? (c) What is the deadweight loss from monopoly power associated with part (a)? (d) What measures might a government use to limit monopoly power?

Answer 1

C = 100 - 5Q + Q^2, P = 55 - 2Q Total Revenue = Price times Quantity = P times Q = (55 - 2Q)Q = 55Q - 2Q^2 Marginal Revenue = d(Total Revenue)/dQ = d/dQ(55Q - 2Q^2) MR = 55 - 4Q C = 100 - 5Q + Q^2 Marginal cost = dC/dQ MC = -5 + 2Q (a) For the maxn profit the condition is P > MR = MC MR = MC 55 - 4Q = -5 + 2Q 60/6 = Q implies Q = 10 \r\n Price be P = 55 - 2Q P = 55 - 2 times 10 P = 35 profit = Total Revenue - Total cost = P times Q - (100 - 5Q + Q^2) = 35 times 10 - 100 + 5 times 10 - 100 = 200 consumer surplus = Area of a triangle BED [in fig] = 1/2 times (55 - 35) times 10 CS