Production of certain good is discrete and has a cost structure characterized as

Question

Production of certain good is discrete and has a cost structure characterized as follows: q100 200 300 400 500 600 240 220 200 190 188 187 Assume inverse demad is p(Q) 500 0.5Q. a. Find the optimal monopoly output. b. Assume an incumbent monopoly operates according to (a). Show that it is profitable for a second firm to enter c. Find the monopoly output level that would deter entry.

Explanation / Answer

q AC TC MC Price TR MR Profit 100 240 24000 450 45000 21000 200 220 44000 20000 400 80000 35000 36000 300 200 60000 16000 350 105000 25000 45000 400 190 76000 16000 300 120000 15000 44000 500 188 94000 18000 250 125000 5000 31000 600 187 112200 18200 200 120000 -5000 7800 a) The monopolist will produce till MR >MC. So will produce Q = 300 units. b) the cprofit column shows that profit is positive at higher output level. So, it is profitable for second firm to enter. c) To deter entry output produced will be such that MR

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