Question

Let weekly demand for tankers of water to a small village be represented by the following demand curve:

P = 160 – 20Q

And suppose that HydroTank is the monopoly supplier of water to the village with a marginal cost curve:

MC = 40 + 20Q;

a) On a clearly labeled diagram, sketch the demand, marginal revenue, and marginal cost curves and calculate and show the monopolist’s profit-maximising quantity(QM) and the price that will be charged in the market (PM).

b) Calculate the consumer surplus and producer surplus at the monopoly equilibrium and the deadweight loss of the monopoly outcome compared to the socially efficient quantity and show these on your diagram.

Finally, suppose that HydroTank’s average total cost of supplying 1 tanker is $130, 2 tankers is $110, 3 tankers is $105, and 4 tankers is $105.  

c) Calculate HydroTank’s monopoly profit and explain what would happen if HydroTank was forced to charge the socially optimal price for water.

Answer 1

Monopo , Total Revenve TRe P.« nue 二160-20120) 160-40Q t max imsing Con 0 = [Go-yo 130

leel for wanopoly a sheum below Gnaph (60 M C 60 40 ao NK. An ac

ni.carerPus-i Cat

ニalus) es - 3-2 0