Question

4. Draw the demand, marginal-revenue, and marginal-cost curves for a monopolist. b! Show the profit-maximizing level of i t! output. Show the profit-maximizing price. 5. In your diagram from the previous question, show the level of output that maximizes total surplus. Show the deadweight loss from the monopoly. Explain your answer.

Answer 1

Costs & Revenue МC F ATC P1 В P AR E Q1 Q MR 0 Output

5. The level of output that maximises total surplus is OQ1. As for highier price smaller quantity is being sold. Price is greater than marginal cost. The deadweight loss is shown as the red shaded portion of the diagram ABC. It is called deadweight loss because total surplus in the economy is less than it would be if the market were competitive,since monopolist produce less than the socially efficient level of output.

8. a. The profit maximising price would be where revenue is maximum. Here it is at $4 and quantity 400. Where revenue is maximised, which occurs when MR=0, since MC=0. The effective level of output is 800 since that's where price=MC=0. The profit maximising quantity is lower than efficient quantity because the firm is monopolist.

b. If the company is interested in profit maximisation it should not build the bridge, because it's profits are negative. Revenue it can earn= $1,600,000. Cost will be=$2,000,000. Lose=$400,000.

c. If the government were to build the bridge it should set price equal to marginal cost,for efficiency. But as MC=0 government should not charge people for the use of the bridge.

d. Yes the government should build the bridge. As it would increase the society's total surplus, which is beyond cost of building the bridge.