Answer part (a) assuming the firm faces the market demand below: q P q P 0 40 6
ID: 1247999 • Letter: A
Question
Answer part (a) assuming the firm faces the market demand below:
q P q P
0 40 6 28
1 38 7 26
2 36 8 24
3 34 9 22
4 32 10 20
5 30 11 18
a) Explain why, even if we knew nothing of the firm's costs, we don’t need any more of the demand curve if the firm is a monopolist.
Suppose the cost of producing the firm's output is the following:
q TC q TC
0 9.129 5 138.5
1 34.75 6 166.2
2 60.25 7 196
3 86 8 229
4 112 9 269
b) If a monopolist has the costs and demand given above, find the firm's MR, profit maximizing price, and quantity. Explain why this outcome can continue in the long run for the monopolist but couldn’t if the firm was in a perfectly competitive market.
Explanation / Answer
a) If a firm is a monopolist, that means it is the only firm in the market so it's demand function is the demand function for the market. b) MR = -$2 (the price decreases by 2 for every unit sold) Profit maximizing price = $38 Profit maximizing quantity = 1 unit (assuming they cannot sell 0 units, the sale of 1 unit is the only option that covers the TC). This can continue because the firm is a monopoly and they control the market supply. However, if the firm was in a competitive market, other firms would have influence on the supply and then the monopoly would have to sell at a lower price but maintain the same costs (which would result in a negative profit).