Question

Suppose demand in a market is P 120 Q 240 2P This is a monopoly market, where MC = 30. There are no fixed costs. (a) Illustrate demand, marginal cost and marginal revenue in a figure (b) What is the profit-maximizing quantity? Explain why. How big is the profit? (e) How large is the socio-economically optimal quantity? Explain why. How big is the loss of welfare if you instead choose the quantity that maximizes the profits of the monopoly company? (d) Now suppose that the company must pay a tax of 30 for each unit sold of the product. What will be the price, quantity and profit in this case? Calculate the socio-economic net surplus in this case.

Answer 1

11 NR/P TR = a) PXa (120 200 2 120Q 150 ool 50 TRla) MR= MC 30 HR DD CQ MR 120 100 200 300B MR (20 P= 120 2 Demand: 20 २५० MC 30 eld

TC= P-Mc)a 20--30) 2 90 T- 2 Foc: T O 90-a 0 at a-90, Monepelist achieves het proft 90 x90 2 &100 2 8100-Y050 TL = c) Socially optimaluantity occu whee demand = Mc e 30 2. 90 2 180 Ap we choose monopely maximiziry quan y e. a = 90, then at aM 90 = 75 P= 120 So, Welfare LoAShaded tnarye Areg "글지0-19)x (75-30) 30= Pe "x우0x 45 45 QM-10

d2 Tax will incrape the pnce fycs S, Pt 30 2 P= 90-a 2 TR 900-@2 MR 90-a MC= 30 Secially ophimal output oftr tax Nav Demand Mc 90-a - 30 0 befr tax =x tfo x (-30) Consumes Serply 9ox 90 = 8 100 Cons umer Surplya fhr tax = x tX 9 o 60 = 3600 Net Consumer Surplu 8100-3600 4500