Answer to Question #108618 in Microeconomics for Andie Coulthard

Question #108618

1. A monopolist faces a linear demand for its product and has a flat marginal and average cost of production. An innovation lowers the cost of production by $1 per unit. Use the graph to show the profit-maximizing monopolist’s choice and the changes due to the innovations.

a. How much will the price change as a result of the innovation?

b. How much will profit per unit change as the result of the innovation?

c. Summarize: who benefits from the innovation? Explain in 2-3 sentences.

Expert's answer

a. The price will decrease as the result of the innovation.

b. The profit per unit will also increase as the result of the innovation.

c. Both consumers and monopolist benefit from the innovation, because either consumer surplus or producer surplus will increase.