Question

2. Consider a monopolist with the following demand curve 390-20 P = The monopolist has MCM = ACM = 30 a. Solve for the profit-maximizing level of monopoly output, price and profits b. Suppose a potential entrant is considering entering, but the monopolist has a cost advantage. The potential entrant has costs MCPE = ACPE = 40. Assuming the

Only answer A.

Answer 1

Answer : A) Given,

P = 390 - 2Q

TR (Total Revenue) = P * Q = (390 - 2Q) * Q

=> TR = 390Q - 2Q^2

MR (Marginal Revenue) = $\Delta$TR / $\Delta$Q

=> MR = 390 - 4Q

MC = 30

For monopolist the profit-maximizing condition is MR = MC. So,

390 - 4Q = 30

=> 390 - 30 = 4Q

=> 360 = 4Q

=> Q = 360 / 4

=> Q = 90

From demand function we get,

P = 390 - (2 * 90)

=> P = $210

Therefore, here for monopolist the profit-maximizing price is $210 and quantity is 90 units.

TR = P * Q = 210 * 90 = $18,900

TC = AC * Q = 30 * 90 = $2,700

Profit = TR - TC = 18,900 - 2,700

=> Profit = $16,200

Therefore, here for monopolist the profit is $16,200.