Question

Monopoly’s marginal cost is constant and equal to c. monopoly demand function given by D(p) = 180 – p. After maximizing profit, quantity of 80.

a) Illustrate graphically the monopoly’s profit maximization.
b) Calculate the monopoly’s marginal cost c.
c) Calculate the monopoly’s profit in case it has a fixed cost of 1400.
d) Calculate the social welfare (or deadweight) loss caused by the monopoly (not taking into account the monopoly’s fixed cost).

Answer 1

Answer on Question #47995, Economics, Microeconomics

$\mathrm{MC} = \mathrm{c}, \mathrm{D}(\mathrm{p}) = 180 - \mathrm{p}, \mathrm{p} = 180 - \mathrm{D}(\mathrm{p}), \mathrm{q} = 80.$

a) Illustrate graphically the monopoly's profit maximization.

b) Calculate the monopoly's marginal cost c.

If $q = 80$ , then $p = 180 - 80 = \$100$

Quantity is maximized in point, where $\mathrm{MR} = \mathrm{MC}$

$\mathrm{MR} = \mathrm{TR}' = (\mathrm{p}^* \mathrm{q})' = ((180 - \mathrm{q}) \mathrm{q})' = 180 - 2\mathrm{q}$

As $q = 80$ , then $\mathrm{MC} = \mathrm{MR} = 180 - 2^{*}80 = 20$

c) Calculate the monopoly's profit in case it has a fixed cost of 1400.

If $\mathrm{FC} = 1400$ and $\mathrm{MC} = \mathrm{TC}' = 20$ , then $\mathrm{TC} = 1400 + 20q = 1400 + 20*80 = 3000$

$\mathrm{TP} = \mathrm{TR} - \mathrm{TC} = \mathrm{p}^{*}\mathrm{q} - \mathrm{TC} = 100^{*}80 - 3000 = \$ 5000$

d) Calculate the social welfare (or deadweight) loss caused by the monopoly (not taking into account the monopoly's fixed cost).

Deadweight loss will be: $0.5^{*}(100 - 20)^{*}(160 - 80) = \$ 3200$ .

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