Question

A monopolist's total costs are given by C = 5y, where C is cost and y is output. The demand function it faces is is given by y = 65 – p where y is output and p is price. a) What is the marginal cost of each unit of output? (1) b) What level of output is the minimum average cost? (1) c) How much will the monopolist charge for each unit of output and how much output will it produce? (2) d) How much would the firm charge if it was operating in a competitive market? (2) e) Graphically show the supply and demand functions if this had been a competitive market. Show the level of output and price at the equilibrium and the slope and intercepts of the demand curve. Further show the marginal revenue curve to show the monopolists's decision in part (c). (2)

Answer 1

a) MC = dC/dY = 5

b) AC = C/y = 5

AC is fixed at 5,

So Minimum of AC = 5, then y = 65-5 = 60

C) for MONOPOLY Eqm

MR = MC

65-2y = 5

60= 2y

y*= 30

P*= 65-30 = 35

D) in perfect Competition

At eqm, P = MC = 5

So y= 65-5 = 60

E) graph

65 60 40 P demand curve 20 MR curve supply curve MCX 5 competitive 0 20 Q 40 eqm 60 65