Question

Market demand is P=35-5Q. The Marginal Cost of producing an extra unit is $2 no matter who produces it and that is the only cost of production. What is the difference between the monopolist's PRICE and the price that would result in a perfectly competitive market? Enter a negative sign if the monopolist's price is smaller.

Answer 1

solution — Demand function , P = 35 —5Q , Total revenue (TR) = P. Q = 35 Q — 5 Q^2

Marginal revenue (MR)=d(TR)/d Q = 35 — 10 Q

• At the monopolist equilibrium, MR=MC or 35—10Q = 2 or, 10Q=33 or Q = 3.3 ( equilibrium quantity) Equilibrium price P = 35 —5×3.3 ( put equilibrium Q in the demand function) , P = 35 — 16.5 = 18.5 ( equilibrium price)
• At the competitive equilibrium; P =MR = MC or, P = MC = 2 ( constant) Thus equilibrium competitive price P = 2
• Difference in monopoly and competitive price (Pm—Pc) = 18.5 — 2 = 16.2