Question

Price 18+ 16 14 + 12 + 10+ 8 MC - AC-58 6+ D 4+ MR 0 1 2 3 4 5 6 7 8 a) To maximize profit the monopoly will produce lunches and charge per lunch. (2 points) b) How did you determine the monopoly's equilibrium price and quantity? (list your steps) (2 point) C) If the firm loses its monopoly status and many other firms are allowed to enter the market so that the market becomes competitive, the output will be lunches and the price will be $_ per lunch. (hint in perfect competition MR and Demand curve are the same) (2 points) d) Compared to prefect competition, the output for a monopoly will be _(less, more), and the monopoly price will be (higher, lower) than the price in perfect competition (2 points)

Answer 1

a) Under monopoly, profit maximising level of output is achieved where;

MR = MC

From the above figure,

To maximise profit the monopoly will produce where MR curve and MC curve intersect, it is at quantity 4 lunches and will charge $12 per lunch.

b) Under monopoly, profit maximising level of output is achieved where marginal revenue is equal marginal cost.

MR = MC

At this point, quantity is 4 lunches and the price which will be charged will be where quantity demanded, 4 lucnes at the demand curve, i.e $12.

c) Under perfect competetion, marginal revenue curve and demand curve is same. This implies that the demand curve will be MR curve. The profit maximising condition will be;

P = MC

This is at the output level 8 lunches and price level $8 per lunch.

d) As we know, profit maximising output under monopoly is 4 and price is $12.
Also, profit maximising output under perfect competetion is 8 and price is $8.

Compared to perfect competetion, the output for a monopoly will be less and the monopoly price will be higher than the price in perfect competetion.