Question

3. The graph below represents a monopoly: Price Marginal Cost 40 - 30 20 Demand 00 150200 Quontity Marginal Revense a) What is the socially efficient price and quantity? b) What is the monopoly price and quantity? c) What is the area of deadweight loss? 4. Suppose executives at an art museum know that 100 adults are willing to pay $12 for admission to the museum on a weekday. Suppose the executives also know that 200 students are willing to pay $8 for admission on a weekday. The cost of operating the museum on a weekday is $2,000. a) How much profit will the museum earn if it charges all customers $8 for admission? b) How much profit will the museum earn if it charges all customers $12 for admission? c) How much profit will the museum earn if it engages in price discrimination?

Answer 1

(3)

(a)

Socially efficient outcome is obtained at intersection of Price (Demand) and MC curves, with efficient output 150 and price 30.

(b)

Monopoly outcome is obtained at intersection of MR and MC curves, with monopoly output 100 and price 40.

(c)

Deadweight loss = (1/2) x Change in price x Change in quantity = (1/2) x (40 - 30) x (150 - 100) = 0.5 x 10 x 50 = 250

NOTE: As per Answering Policy, 1st question is answered.