Question

GoGo Pizza is producing at the profit-maximizing level of output in a monopolistically competitive market. i Show GoGo Pizza's profit-maximizing level of output, selling price, and a positive profit in a diagram. Briefly explain. (8 marks) ii. Does GoGo Pizza have an incentive to produce at the level of output that maximizes the social welfare? Explain with the diagram in part (i). (5 marks)

Answer 1

Mc Тc ARED Puantity ma
i) Monopolist produce at a point where MR=MC and the profit arises at a situation when the price charged by the firm is above ATC. Here the price monopolist charge is P* and the quantity they sell at that price is Q*. Shaded region is the profit they earn from it.

ii) If monopolist charge a price that maximize social welfare i.e. charge a price which a perfectly competitive firm will charge. Perfectly competitive charges a price where MC=AR as AR is demand curve for perfectly competitive and the portion of MC above ATC is supply curve for perfect competitive firm. It makes the price Ps and output sell is Qs. It gives no incentive to monopolist it reduces their profit level by a little as well as producing more of the goods takes up more raw material and labor cost.