Question

1. You have the following information about a monopolist p = 60 − 2q (1) MR = 60 − 4q (2) MC = 40 (3) where equation (1) is the demand curve, equation (2) is the marginal revenue function, and equation (3) is the marginal cost function, assumed to be constant here. (i). Under the perfect competition outcome, what would be the profit-maximizing level of output (qc) and price (pc)? (ii). Under the monopoly outcome, what would be the profit-maximizing level of output (qm) and price (pm)? (iii). Use the data obtained from questions (i) and (ii) to solve for the dollar value of the deadweight loss of monopoly power. Provide a brief definition explaining the deadweight loss from monopoly power and how this problem can be addressed by policymakers. (iv). Use an appropriate market mechanism diagram to show the estimated deadweight loss, including the profit maximizing level of output and price derived under the perfectly competitive outcome and the monopolist outcome. Label your axis and curves properly. (v). Use the Lerner index to approximate the degree of monopoly power using the monopolist profit-maximizing price and quantity

Answer 1

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