A monopoly has fixed costs of $9,000, and constant marginal costs of $10 per uni

Question

A monopoly has fixed costs of $9,000, and constant marginal costs of $10 per unit. The demand curve for the company's product is given by P = 554 - 8Q. If the firm charges the socially efficient price, how much profit will it make? If the firm acts as a single price monopolist, what quantity does it produce, what is the deadweight loss? Suppose the firm is taken over by the state. Due to the lack of incentive, marginal costs rise to $12 per unit. If the firm charges the marginal cost, what is the deadweight loss? Show all losses on a diagram.

Explanation / Answer

a. Socially optimal price (which is also allocative effiency) : P=MC:

P= 10

Q=(554-10)/8= 68

Profit = 10*68 -10*68 -9000=-$9000

b. The profit maximizing price is where MC = MR.

P = 554 -8Q

Revenue = (554 -8Q)*Q

MR = 554 -16Q

554 -16Q = 10

Q= 34

P = 554 -8*34=$282

Quantity produced= 34

Deadweight loss = 2*1/2*(282-10)*(68-34)= 9248

c. P = 12

554-8Q = 12

Q = 68

The profit maximizing price is where MC = MR.

Remember when you are lining up the prices that you must go up from the point where MC = MR

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.