Question

Worksheet 7 1. Use the figure below to answer the following questions. P, MR, MC, ATC $50 ATC MR 100 150 200 250 300 400 Quantity of output (per week) a. What quantity would they sell? What would be the price? b. What will be the profit of this monopoly? c. What will be the consumer surplus in this unregulated monopoly? d. Is this a natural monopoly? Why or why not? e. Suppose this firm was able to practice perfect price discrimination, what quantity would they sell? What would be the consumer surplus and the deadweight loss?

Answer 1

- as the monopolist optimizes his profit at MR = MC Then the monopolist would produce the output level for which ma intersects the MC cure. Then the equilibrium output in 200. . The monopolist set the price for optimum output from demand curve. The price for Q=200 in P=30] b) The average total cost of producing Q = 200 .is: 1. ATC = 18. Theri profit is. A = (30-18]* 200 = 2400] ) Consumere swephus: cs = $x(50-30)* 200 ..:: :2000 d) The natural monopolist has falling ATC for the entire range of output that market demands. Here at p=0, market demands Q= 400 units , but the ATC is minimized at Q = 250.. Then for Q> 250 the monopolist has rising ATC. Hence, this is not a natural monopoly. e) For perfect price discrimination, the firm charges different price for each level of output. The firm can sell that amount of output as long as its revenue covered its its incremental cost or P= Me.. . Then the monopolist would produce Q=300] The perfect price discriminating monopolist son is able to etract all consumer sweptus

Because the monopolist charges the price consumer is willing to pay for each level of output. The consumer surplus is perfect price discrimination is zero.

On the other hand, the firm produces a socially optimum output (P=MC). Therefore, the loss to society is zero or deadweight loss is zero.