ECO101H1 : 4 - Monopoly

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purplemuskrat605

19 Jul 2013

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ECO101H1 Full Course Notes

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A monopoly is the sole producer in an industry. This means industry demand is demand for the monopoly and that the marginal cost and average cost functions of the monopoly are the marginal cost and average cost functions for the industry. Since price is not constant, marginal revenue is not equal to price for a monopolist. P is not constant and price is dependent upon the output of the monopoly, a monopoly can determine commodity price by restricting output. Profit maximization for a monopolist: mr = mc. Mr for linear demand has the same intercept term as the demand function and twice the slope. Elasticity is unit elastic at the midpoint of a demand function, which means that mr is 0 at the midpoint because total revenue doesn"t change. A monopoly will not produce in the inelastic portion of a demand function since a decrease in quantity will a) increase total revenue and b) reduce variable costs.

Related Questions

Suppose a monopolist faces a demand curve for its output of P = 300âQ. This means that the marginal revenue curve of the monopolist is M R = 300 â 2Q. Assume that the marginal cost of production is constant and equal to $40.

a) Write down an expression for the monopolists profit, as a function of the quantity of output it produces.

b) If the monopolist must charge the same price for all units of output that it sells (that is, if the monopolist is a single price monopolist), what level of output will maximise the monopolists profit? What price will the monopolist charge? What is its level of profit?

c) If this were a competitive market instead of a monopoly, what level of output would be produced and what price would be charged? What is the level of profit for firms if it were perfectly competitive?

d) Draw a diagram of demand, marginal revenue, and marginal cost that illustrates your answer to part b). From this work out consumer surplus and producer surplus.

e) Draw the same diagram but for your answer to c), the case of the competitive market. From this work out consumer surplus and producer surplus. How much deadweight loss is there from the monopoly? Why?

sangriapug675

1. Which of the following is true under a monopoly?

A. Monopolist chooses the highest possible price.
B. Monopolist chooses a price that is always higher than marginal cost of production.
C. Marginal revenue of a monopolist is price.
D. None of the above are true for monopoly.

2. You are the manager of a monopoly that faces a demand curve described by P = 230 -20Q. Your costs are C = 5 +30Q. The profit-maximizing output for your firm is:

A. 4
B. 5
C. 6
D. 7

3. Which of the following is true?

A. A monopolist produces on the inelastic portion of its demand.
B. A monopolist always earns an economic profit.
C. The more inelastic the demand, the closer marginal revenue is to price.
D. In the short run a monopoly will shutdown if P < AVC.

4. In a competitive industry with identical firms, long rum equilibrium is characterized by:

A. P = AC
B. P = MC
C. MR = MC
D. All of the above

5. You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q². Your firm's maximum profits are:

A. 125
B. 250
C. 100
D. 85

6. A perfectly competitive firm faces:

A. A perfectly elastic demand function
B. A perfectly inelastic demand function
C. a demand function with unitary elasticity
D. none of the above

purpleworm770

Your monopoly company exhibits the following costs:

TC=60+6Q+Q² & MC=6+2Q

And the following market demand and marginal revenue functions:

Qd=598-P; MR=598-2Q

a)Find the profit maximizing level of output for the monopoly

b) At what price does the monopolist sell its good?

c)What are the monopolist profits

d)Is there any dead weight loss in the market?

rubyzebra457

ECO101H1 : 4 - Monopoly

ECO101H1 Full Course Notes

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