Question

1. Suppose that a single-price monopolist faces the demand function P 100 Q where I is average weekly household income, and that the firm's marginal cost function is given by MC(Q) 2Q. The firm has no fixed costs. = (a) If the average weekly household income is $600, find the firm's marginal revenue function. (b) What is the firm's profit-maximizing quantity of output? At what price will the firm sell that output? What will the firm's marginal cost be? (c) On a graph with Q curve, marginal revenue curve,, and marginal cost curve. Identify the areas that repre- sent consumer and producer surplus on the horizontal axis, and P on the vertical, plot the firm's demand (d) What will be the consumer and producer surplus in the market? (e) Now suppose that average weekly household income rises by $400. Find the new profit- maximizing quantity and price for the monopolist. What will the firm's new marginal Cost be? (f) Find the consumer and producer surplus in the market following the increase in household income (g) Finally, suppose that, as a result of higher wages in the area, the firm's marginal cost of production has increased to MC = 3Q. Taking into account both the increased marginal cost, and the increase in average household income, find the new profit-maximizing price and quantity, as well as the new marginal cost (h) Find the new consumer and producer surplus in the market

Answer 1

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