A monopolist’s has a constant marginal and average cost of $10 and faces a deman

Question

A monopolist’s has a constant marginal and average cost of $10 and faces a demand curve of QD = 1000 – 10P. Marginal revenue is given by MR= 100 - 1/5Q.

A. Calculate the monopolist profit maximizing quantity, price and profit.

B. Now suppose that the monopolist fears entry, but thinks that other firms could produce the product at a cost of $15 per unit (constant marginal and average cost) and that many firms could potentially enter. How could the monopolist list attempts to deter entry and what would the monopolist quantity and profit be now?


C. Should the monopolist try to deter entry by setting a limit price?

Explanation / Answer

A. A monopolist will produce at the quantity where MC = MR. 10 = 100 - 1/5Q Q = 450 QD = 1000 - 10P 450 = 1000 - 10P P = 55 Profit = (P-AC)*Q Profit = (55-10)*450 Profit = 20,250 B. Firms will enter any market where there are positive economic profits to be made. Therefore, so long as the price is above $15, other firms will enter as they face a constant MC and AC of $15. Any price above $15, other firms stand to make money. The monopolist is only able to deter entrance by pricing their good at $15 and selling 1000-10*15 = 850 of the good. At this level, they will make a profit of (15-10)*850 = 4250. C. The monopolist should not try to deter entry. Should a competitor enter, the monopolist could simply reduce price and ramp up production to the above-mentioned amounts. There is no need to pre-empt this move and guarantee a reduction in profits.

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