Question

6. The accompanying diagram shows the demand, marginal revenue, and mar- ginal cost of a monopolist. a. Determine the profit-maximizing output and price. b. What price and output would prevail if this firm's product was sold by 2 price-taking firms in a perfectly competitive market? c. Calculate the deadweight loss of this monopoly. $120 110 100 MC 80T 70 50 30 10 MRD Quantity 0 12 34 5 6 7 8 9 10 12 13 14 15

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Answer 1

a) A monopoly will maximize the profit while producing at a point where the MR and the MC are equal. Here, in this graph that is at quantity 3. the price of the good set by the monopolist will be 70.

b) In a perfect market condition, the firm will sell at the point where the MC curve and the price are equal. i.e. at a point where the MC or the marginal cost and the demand are equal. Here, that is at quantity 4 and price 60.

c) Deadweight loss in the monopoly market is the small triangle that exist between the output of the monopoly and the perfect market condition. That is 1/2 ((70 -40) x (4-3))

= 1/2 (30 x 1)

= 15. The deadweight loss in the market is only 15.