(a)
To compute:
The profit-maximizing quantity and
Answer to Problem 14E
The profit-maximizing quantity and price are Q*=4.5 and P*=$6.5.
Explanation of Solution
The price and quantity schedule is given. The profit-maximizing output for a
The marginal cost is constant at $4 for all levels of output. The total proceeds or income from sale of a given level of output is called total revenue (TR). While the additional revenue generated from sale of an additional level of output is regarded a marginal revenue (MR).
First, calculate TR and MR using the formula below.
Price (P) | Output (Q) | TR (Total Revenue) | MR (Marginal Revenue) | MC (Marginal Cost) |
10 | 0 | 0 | 0 | 4 |
9 | 1 | 9 | 9 | 4 |
8 | 2 | 16 | 7 | 4 |
7 | 3 | 21 | 5 | 4 |
6 | 4 | 24 | 3 | 4 |
5 | 5 | 25 | 1 | 4 |
4 | 6 | 24 | -1 | 4 |
3 | 7 | 21 | -3 | 4 |
2 | 8 | 16 | -5 | 4 |
1 | 9 | 9 | -7 | 4 |
0 | 10 | 0 | -9 | 4 |
Using the MR and MC schedules in the table above, draw the graph for MR and MC. The profit-maximizing quantity and price are Q*=4.5 and P*=$6.5.
Monopoly:
Monopoly is a market structure where only one seller exists, and product is differentiated.
The demand for a good is the quantity of that good that consumers are willing and able to purchase at different prices.
Total Revenue (TR):
The total proceeds or income from sale of a given level of output is called total revenue.
Marginal Revenue (MR):
The additional revenue generated from sale of an additional level of output is regarded a marginal revenue.
Average Revenue (AR):
When at any level of output, the total revenue is divided by that level of output, we get the average revenue. AR is also the demand curve.
Total cost (TC):
The total outlay in production activity is referred to as total cost.
Marginal Cost (MC):
The additional cost of producing an extra unit of output is referred to as the marginal cost of producing that unit of output.
(b)
To compute:
The
Answer to Problem 14E
The deadweight loss resulting from the production of monopoly output is $1.875.
Explanation of Solution
Perfect competition is a market structure where large number of buyers and sellers exist, and products are homogeneous. Monopoly is a market structure where only one seller exists, and product is differentiated.
The case of perfect competition is regarded as the benchmark case since the output produced is socially optimum where there is full utilization of resources and no underemployment exists. It implies that the competitive output is such that
Under monopoly, the monopolist produces where MR=MC. Monopoly results in deadweight loss since the output produced is less than socially optimum output.
The deadweight loss in case of monopoly is calculated and shown below:
Perfect competition:
It is a market structure where large number of buyers and sellers exist, and products are homogeneous.
Monopoly:
Monopoly is a market structure where only one seller exists, and product is differentiated.
Deadweight loss:
It is the loss in social surplus that is due to production of less than socially optimum output.
Demand:
The demand for a good is the quantity of that good that consumers are willing and able to purchase at different prices.
Total Revenue (TR):
The total proceeds or income from sale of a given level of output is called total revenue.
Marginal Revenue (MR):
The additional revenue generated from sale of an additional level of output is regarded a marginal revenue.
Average Revenue (AR):
When at any level of output, the total revenue is divided by that level of output, we get the average revenue. AR is also the demand curve.
Total cost (TC):
The total outlay in production activity is referred to as total cost.
Marginal Cost (MC):
The additional cost of producing an extra unit of output is referred to as the marginal cost of producing that unit of output.
Want to see more full solutions like this?
- Suppose a monopoly firm has the following Cost and Demand functions: TC=Q2 P=80-Q MC=2Q MR=80-2Q Carefully explain what the firm is doing and why. Find the firm’s Profit maximizing Q Find the firm’s Profit maximizing P. Find the firm’s Profit. Suppose because of an advertising campaign, which costs $500, the monopoly’s demand curve is: P=100-Q so its MR= 100-2Q. MC=2Q Looking closely at the TC function and the demand curve, explain the effects of the advertising campaign on the equations compared with the equations above in part 1. Find the firm’s Profit maximizing Q Find the firm’s Profit maximizing P. Find the firm’s Profit. Was the advertising campaign successful? Compare 2 w/ 1. Why?arrow_forwardQUESTION 2 Consider the following market with a single firm. Demand: P = 180 - 2 Q Marginal Cost: 57 + Q PART A. If the firm is a single price monopolist, it will produce a quantity QM = The equilibrium price will be PM = PART B. If this firm were a price taker and P = MC, it would produce a quantity Q = 41 and price P= 98 Given this, the monopoly deadweight loss (the money left on the table) is dollars. PART C. Now suppose the firm is a two-price monopolist, separating its customers along the lines of their reservation prices, with a high price retail market and a lower discount price market. The price and quantity in the retail market is the same as what you found in Part A. All remaining customers are potential buyers in the discount market. The quantity that maximizes the monopolist's profits in the discount market is Qp = - and the equilibrium price in the discount market is PD = PART D. As a result of the monopolist offering a discount price, the monopoly deadweight loss is…arrow_forwardUse the following Table showing the demand schedule for a monopolist facing a constant marginal cost of $4. Assume that the firm pays no fixed costs. How many units of output will the firm produce, and how much economic profit will be earned? Quantity Demanded 1 2 3 4 5 6 7 8 9 Price $12 $11 $10 $9 $8 $7 $6 $5 $4 A) 5 units; $8 B) 5 units; $40 C) 7 units; $36 D) 7 units; -$6 E) 5 units; $20arrow_forward
- A monopolist has an inverse demand curve given by p(y) =12 − y and a cost curve given by c(y) = 3y. 1. Find the marginal revenue and marginal cost functions.2. Find the optimal price and quantity for the monopolist.3. Find the optimal price and quantity if the market is competitive. Note that in the competitive market firm produce where MC=AC.4. Calculate the consumers surplus and deadweight loss of due to monopoly I need all four parts answered. I would prefer a diagram to accompany part 4.arrow_forwardA Monopolist has the following demand, marginal revenue, and marginal cost: p = 100 – 5q mr = 100 – 25q mc = 25 How much higher will the monopoly price be than the perfectly competitive price?arrow_forwardFruity Apples is the monopolist in the market for apples. The following equations describe the demand, the marginal cost, and the total cost, where Q is in pounds and P is price per pound. Demand: P = 93 - Q Marginal cost: MC = 3 + 2Q Total cost: TC = 3Q+Q². What would the equilibrium price and quantity be if this market was perfectly competitive? P = $61 and Q = 32 pounds P = $30 and Q = 63 pounds P = $63 and Q = 30 pounds P = $32 and Q = 61 poundsarrow_forward
- Use the following demand schedule for a pure monopolist to calculate total revenue and marginal revenue at each quantity. Plot the monopolist’s demand curve and marginal-revenue curve, and explain the relationships between them. Explain why the marginal revenue of the fourth unit of output is $3.50, even though its price is $5. What generalization can you make as to the relationship between the monopolist’s demand and its marginal revenue? Suppose the marginal cost of successive units of output was zero. What output would the single-price monopolist produce, and what price would it charge?arrow_forwardAssume a monopolist faces a market demand curve P = 100 - 2Q and has the short run total cost function C = 640 + 20Q What is the profit-maximizing level of output? What are profits? Graph the marginal revenue, marginal cost, and demand curves, and show the area that represents deadweight loss on the graph.arrow_forwardA monopolist faces the following aggregate demand function: Q = 28 – 1/2 P. Total production costs for the firm are TC(Q) = 40Q. Calculate the consumer surplus, producer surplus, and profits in equilibrium. Then, suppose that the monopolist decides to spend 10 to purchase a patent that would allow her to decrease total costs by 4 per unit. Find the new equilibrium quantity, price, new consumer surplus, producer surplus, and profits to the monopolist after the purchase of the patent.arrow_forward
- Suppose that market demand for a good is Q=480 - 2p. The marginal cost is MC = 2Q. Calculate the deadweight loss resulting from a monopoly in this market.arrow_forwardSuppose that a monopolist’s demand curve is P = 9 – 2*Q. Marginal cost is expressed as follows: MC = 0.5*Q. What is the profit-maximizing price (P) the monopoly should set? What would be the output (Q) at that price? What are the current values for the consumer and producer surpluses (CS and PS)? Is it possible to calculate the profit made by the monopolist? If so, how much is it? If not, what other information would be needed to do that? What would be the 2 key options for a government regulator to increase the consumer surplus (CS) and reduce the producer surplus (PS)? Explain briefly the pros and cons of one of the options!arrow_forwardConsider the diagram below: a) If a firm is single –price monopolist, what price firm will charge and what is the profit maximizing output? Calculate the area of monopolist’s profit (in tk), consumer surplus (in tk) and deadweight loss (in tk) from the information of the diagram. b) If the firm would work as a perfectly price discriminating monopolist, what amount of output firm would have produced? How firm would have charged price? Calculate the area of consumer surplus (in tk), profit(in tk) and deadweight loss (in tk) from the information of the diagram. Don,t copy from anywhere. Answer must be correct.Do all answer.arrow_forward
- Microeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506893Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage LearningEconomics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
- Microeconomics: Principles & PolicyEconomicsISBN:9781337794992Author:William J. Baumol, Alan S. Blinder, John L. SolowPublisher:Cengage Learning