A monopolist faces a demand curve given by: P = 40 Q, where P is the price of th

Question

A monopolist faces a demand curve given by:
P = 40 Q, where P is the price of the good and Q is the quantity demanded. The marginal cost of production is constant and is equal to $2. There are no fixed costs of production.
A) (2 points) What quantity should the monopolist produce in order to maximize profit?
B) (2 points) What price should the monopolist charge in order to maximize profit?
C) (2 points) How much profit will the monopolist make?
D) (2 points) What is the deadweight loss created by this monopoly (hint: compare the monopoly outcome with the perfectly competitive outcome).
E) (2 points) If the market were perfectly competitive, what quantity would be produced?

Explanation / Answer

In monopoly profit maximization occurs when MR = MC

We know, P = 40 – Q

MR = 40 – 2Q

40 – 2Q = 2

Q = 19

P = 40 – 19 = 21

Profit = 21 x 19 = 399

Find intersection of P and MC for perfectly competitive outcome.

40 – Q = 2

Q = 38

Deadweight loss = 2 x (38 – 19) = 38

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