a) Note that we have mark up = (P - MC)/P. This gives mark up = 1 - MC/P. Now that we have MC = P(1 - 1/e) we see that MC/P is 1 - 1/e. Hence mark up becomes 1 - 1 + 1/e. This indicates that mark up is 1/e where e is the absolute value of elasticity of demand. Thus, mark up percentage is the reciprocal of absolute value of price elasticity of demand. This is a measure of monopoly power because it indicates the divergence between price and marginal cost. If firm has market power, it can charge a price higher than marginal cost. The greater the market power, the larger will be the difference between price and marginal cost implying a larger mark up close to 1.
b) Deadweight loss of a monopoly is the loss of efficiency that results when the monopolist charges a higher price and produces a lower quantity than the competitive market. This is shown as a region between the competitive output and monopoly output bounded by demand curve and marginal cost curve.
Government can reduce the monopoly power by regulating the pricing of monopolist. This is done by forcing the monopoly to charge a price equal to marginal cost or average cost. In both the cases there is a reduction in the monopoly power because now monopoly is producing a higher level of output and is charging a lower price.
(a) Explain how the mark-up of price over marginal cost depends on the elasticity of demand....
The following formula shows that the firm’s “markup” over marginal cost depends inversely on the elasticity of market demand, which is called "Lerner Index". Prove this formula step by step from a monopoly's profit-maximization problem. The following formula shows that the firm's “markup” over marginal cost depends inversely on the elasticity of market demand, which is called "Lerner Index". Prove this formula step by step from a monopoly's profit-maximization problem. Pm – MC 1 1 Pm CDP
Assume a first estimate their price elasticity of demand (EQxPx) to be -3.5, and their marginal cost to be $15. 3. Assume a firm estimate their price elasticity of demand (EQxPx) to be -3.5, and their marginal cost to be $15. a. Using the mark-up rule, what is the optimal price for the firm to charge? 2 points b. Confirm that your answer above is correct, by computing the profit maximizing quantity and price using MR = MC if the...
The price elasticity of supply for a product is 3, while the price elasticity of demand is -1. In equilibrium, price is 6 (in hundreds of dollars) and quantity consumed is 2 (in thousands of units). (a) Assuming supply and demand are linear, reconstruct and draw the supply and demand curves. Label the intercepts. (b) If a subsidy of $1 per unit is imposed what are PB and PS after the subsidy? What is the new equilibrium quantity? Illustrate them...
please answer all questions! Figure 15-6 Price $20+ Marginal Cost 100 150 200 Quantity Marginal Revenue Refer to Figure 15-6. What is the deadweight loss caused by a profit-maximizing monopoly? O O $150 $200 $250 Os300 A monopolist faces market demand given by P - 60 - Q. For this market, MR = 90 - 2Q and MC - Q. What price will the monopolist charge in order to maximize profits? O $20 O $30 O so Osso In Canada,...
The graph on the right shows the demand, marginal revenue, marginal cost, and average total cost curves for a monopolist. Show the impact if this firm was regulated to charge the fair-returns price? On graph 2: 1.) Using the point drawing tool, place a point at the output and price combination that would result from regulation if the monopoly was required to charge the fair-returns price. 2.) Using the triangle drawing tool, indicate the deadweight loss that would result from...
Suppose that a monopolist faces a constant marginal cost of 6 and a constant (firm) elasticity of demand of -2. Using the Lerner Index, what is the monopoly price and what is the mark-up (difference between price and marginal cost)?
Practice Question 4. The inverse demand curve a monopoly faces is p = 30 – Q. The firm's total cost function is C(Q) = 0.5Q² and thus marginal cost function is MC(Q) = Q. (a) Determine the monopoly quantity, price and profit, and calculate the CS, PS and social welfare under the monopoly. (b) Determine the socially optimal outcome and calculate the CS, PS and social welfare under the social optimum. (c) Calculate the deadweight loss due to the monopolist...
Figure 15-6 Price $20+ Marginal Cost 100 150 200 Quantity Marginal Revenue Refer to Figure 15-6. What is the deadweight loss caused by a profit-maximizing monopoly? O O $150 $200 $250 Os300 A monopolist faces market demand given by P - 60 - Q. For this market, MR = 90 - 2Q and MC - Q. What price will the monopolist charge in order to maximize profits? O $20 O $30 O so Osso In Canada, in the majority of...
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)...
A.Draw a graph showing the demand, marginal revenue, and marginal cost curves for a typical monopolist, indicating the profit-maximizing price and level of output. Then, identify the competitive price and level of output. B.Making specific reference to your graph for Part A, identify the welfare costs of monopoly. Specifically, show how consumer and producer surplus are different under monopoly vs. competition, as well as any deadweight loss.