Question

The following table shows the demand for a product produced by a monopolist, who has
a constant marginal cost and an average total cost of $45 per unit.
Quantity (thousands of units) Price (dollars per unit)
0 120
1 105
2 90
3 75
4 60
5 45
6 30
a. Calculate the total revenue and marginal revenue for each level of quantity.
b. What are the profit-maximizing level of output and the price of the product?
c. Calculate the monopolist’s profit.
d. Calculate the Lerner Index for this industry.

Answer 1

Question #76114, Economics / Microeconomics

Question: The following table shows the demand for a product produced by a monopolist, who has a constant marginal cost and an average total cost of $45 per unit.

a) Calculate the total revenue and marginal revenue for each level of quantity.

$$TR = P * Q$$ $$MR = \frac{\Delta TR}{\Delta Q}$$

b) What are the profit-maximizing level of output and the price of the product?

Using MR=MC rule, profit is maximized at q=3 and p=75

c) Calculate the monopolist's profit.

Profit=TR-TC=225-4*45=45

d) Calculate the Lerner Index for this industry.

$$E_d = \frac{(P_2 + P_1) * (Q_2 - Q_1)}{(P_2 - P_1) * (Q_1 + Q_2)} = \frac{(60 + 75) * (4 - 3)}{(60 - 75) * (4 + 3)} = -\frac{135}{105} = -\frac{27}{21}$$ $$L = -1 / E_d = 105 / 135 = 21 / 27$$

Answer:

a) in a table

b) q=3, p=75

c) 45

d) 21/27

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