2. A firm is a monopolist in a market. The demand curve for the product is given by P = 20 – 2Q. Recall that for a demand function given by P = a – bQ, marginal revenue is given by MR= a – 26Q. (a) Using only the information given above, what is the lowest possible price the monopolist will choose? Show your work and explain your answer, illustrating your answer with a graph of the demand curve. (b) Now suppose that the firm faces a marginal cost of $2 per unit, and a fixed cost of 30 which is not sunk (this means that the fixed cost does not have to be paid if the firm does not produce anything). How much output does the monopolist produce and what is its price? Show your work and explain your answer. Illustrate your answer with a graph. (c) Is there a deadweight loss from this monopoly? If so, solve for it, and show your work. Identify the deadweight loss on your graph. (d) Suppose instead that the fixed cost increases to 50 (still not sunk). Will your answer to (b) change? Explain.
2. A firm is a monopolist in a market. The demand curve for the product is given by P = 20 – 2Q. Recall that for a demand function given by P = a – bQ, marginal revenue is given by MR= a – 26Q. (a) Using only the information given above, what is the lowest possible price the monopolist will choose? Show your work and explain your answer, illustrating your answer with a graph of the demand curve. (b) Now suppose that the firm faces a marginal cost of $2 per unit, and a fixed cost of 30 which is not sunk (this means that the fixed cost does not have to be paid if the firm does not produce anything). How much output does the monopolist produce and what is its price? Show your work and explain your answer. Illustrate your answer with a graph. (c) Is there a deadweight loss from this monopoly? If so, solve for it, and show your work. Identify the deadweight loss on your graph. (d) Suppose instead that the fixed cost increases to 50 (still not sunk). Will your answer to (b) change? Explain.
Chapter14: Monopoly
Section: Chapter Questions
Problem 14.2P
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Transcribed Image Text:2. A firm is a monopolist in a market. The demand curve for the product is given by
P = 20 – 2Q. Recall that for a demand function given by P = a – bQ, marginal revenue
is given by MR= a – 26Q.
(a) Using only the information given above, what is the lowest possible price the
monopolist will choose? Show your work and explain your answer, illustrating
your answer with a graph of the demand curve.
(b) Now suppose that the firm faces a marginal cost of $2 per unit, and a fixed cost of
30 which is not sunk (this means that the fixed cost does not have to be paid if the
firm does not produce anything). How much output does the monopolist produce
and what is its price? Show your work and explain your answer. Illustrate your
answer with a graph.
(c) Is there a deadweight loss from this monopoly? If so, solve for it, and show your
work. Identify the deadweight loss on your graph.
(d) Suppose instead that the fixed cost increases to 50 (still not sunk). Will your
answer to (b) change? Explain.
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