Question

a. Explain how a profit-maximising monopolist would decide what amount of product to sell. b. ill some consumers be worse off under first-degree price discrimination than they would be with the standard single monopoly price? Using a diagram indicate which consumer gain and which consumers lose c. The industry demand curve for a particular market is: Q-1,800 -200P. The industry exhibits constant long run average cost at al evels of output, regardless of the market structure. Long run average cost is constant at S1.50 per unit of output. i. What are the market output and price under perfect competition? ii. What are the market output and price under pure monopoly? ii What are the consumer and producer surplus under both scenarios?

Answer 1

A.

A monopolist identifies an output level at that, marginal cost equals marginal revenue. At his level of output, profit is maximized.

So, for a monopolist,

MR = MC to maximize the profit and at this point, the output is produced to sell by the monopolist.

B.

(P-MC)/P = 1/-E

Here, P = MC*1.45

Then,

(1.45MC – MC)/1.45MC = 1/-E

E = -(1.45/.45)

E = -3.22

C.

1.

P = 1400-Q

Multiply by Q to the both sides of above equation and differentiation w.r.t. Q, will give MR.

MR = d(P*Q)/dQ = 1400-2Q

For profit maximizing output,

MR = MC

1800-2Q = 8Q

Q = 1800/10

Q = 180 unit

Price = 1800-140

Price = $1660

2.

Total profit = revenue – cost = P*Q – 4Q^2

Total profit = 1660*140 – 4*140^2

Total profit = 154000

3.

For maximum social welfare,

MC = Price

8Q = 1800-Q

Q = 1800/9

Q = 200

Price = 1800 – 200 = $1600

At this price, level, social welfare will be maximized.