The price of a good to be sold by a Monopoly is $0.50. The market has an elastic
ID: 1254022 • Letter: T
Question
The price of a good to be sold by a Monopoly is $0.50. The market has an elasticity of demand (n) of 5.
a. What is the mark-up and what is the Marginal cost?
b. What would this look like for a perfectly competitive market? What would the elasticity of demand (n) be for the perfectly competitive market?
A fictitious cable company, Rox Communications, has a monopoly over the cable services industry in Rhode Island. The market demand curve for cable is P = 1000 - Q, where Q, the firms output, is here the number of hundreds of households with cable. The cost of supplying Y hundred households with cable is TC(Q ) = 500 - 50Q + 2Q*Q. MR=1000-2Q and MC=4Q-50.
a. Find the level or output.
b. What is price in equilibrium?
c. What is the DWL due to the monopolist?
Explanation / Answer
Please rate
P = $0.50
E, elasticity of demand = 5
P = MC
price = marginal cost, in a monopoly, price fixing, profit maximisation condition.
=> MC = $0.50
mark-up price = E/(1 + E) * MC
= 5/ (1 + 5) * 0.5
= $0.4167
b) In PC,
P = MR = MC
=> MC = $0.50
there is no profit maximisation and monopoly in perfect competition, no markup price
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