1. It is given that fixed cost of a Monopolist is $48. The situation is summarized in the following diagram A. Find profit maximizing price and quantity for the monopolist? [2] B. What is the efficient price? [1] C. Calculate deadweight loss from the monopolist’s maximizing profits? [2] D. What are the monopolist’s profits at the profit maximizing price? [2]
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Answers
By the end of this section, you will be able to:
Explain the perceived demand curve for a perfect competitor and a monopoly
Analyze a demand curve for a monopoly and determine the output that maximizes profit and revenue
Calculate marginal revenue and marginal cost
Explain allocative efficiency as it pertains to the efficiency of a monopoly
Consider a monopoly firm, comfortably surrounded by barriers to entry so that it need not fear competition from other producers. How will this monopoly choose its profit-maximizing quantity of output, and what price will it charge? Profits for the monopolist, like any firm, will be equal to total revenues minus total costs. The pattern of costs for the monopoly can be analyzed within the same framework as the costs of a perfectly competitive firm—that is, by using total cost, fixed cost, variable cost, marginal cost, average cost, and average variable cost. However, because a monopoly faces no competition, its situation and its decision process will differ from that of a perfectly competitive firm. (The Clear it Up feature discusses how hard it is sometimes to define “market” in a monopoly situation.)
Demand Curves Perceived by a Perfectly Competitive Firm and by a Monopoly
A perfectly competitive firm acts as a price taker, so its calculation of total revenue is made by taking the given market price and multiplying it by the quantity of output that the firm chooses. The demand curve as it is perceived by a perfectly competitive firm appears in Figure 1 (a). The flat perceived demand curve means that, from the viewpoint of the perfectly competitive firm, it could sell either a relatively low quantity like Ql or a relatively high quantity like Qh at the market price P.