Consider a monopolist selling a single good. The monopolist faces a downward slo

Question

Consider a monopolist selling a single good. The monopolist faces a downward sloping demand curve and a constant marginal cost (supply) curve (this assumption is made to make the math less complicated)

Demand: P = 110 - Q

Supply(MC): P = 20 + Q

Marginal Revenue (MR): P = 110 - 2Q

The monopolist faces constant returns to scale so it's long run average total cost is given by the following: LRATC: P = 70

a. Find the profit-maximizing quantity that the monopolist produces.

b. From part (a), find the price that the monopolist charges.

c. How much economic profit/loss does the firm make? Does the firm stay in business or exit the market?

Explanation / Answer

a. profit is maximum when mr=mc

20 + Q = 110 - 2Q

=>Q = 30 Units

b. P = 110-Q

=> P = $90

c. Revenue = 90*30 = 2700

TC = 70*30 = 2100

Profit = 600

The firm stays in the market

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