Question

Suppose the demand and the marginal cost functions of a monopolist are P = 400 – 2Q and MC=6Q. (i) Determine the equilibrium price and output. (ii) What is the degree of monopoly power?​

Answer 1

Answer:

Explanation:Yes. The monopolist’s pricing rule as a function of the elasticity of demand for its product is:

(P - MC)

P

= -

1

Ed

or alternatively,

P =

MC

1 +

1

E d

æ

è ç ö

ø ÷ æ

è ç ö

ø ÷

In this example Ed

= -2.0, so 1/Ed

= -1/2; price should then be set so that:

P =

MC

1

2

æ è ö ø

= 2MC

Therefore, if MC rises by 25 percent price, then price will also rise by 25 percent. When

MC = $20, P = $40. When MC rises to $20(1.25) = $25, the price rises to $50, a 25% increase.