Question

Suppose a profit-maximizing monopolist faces a demand curve given by Q = 130 – P. a. Write the equations for total revenue and marginal revenue.

b. The firm has fixed costs of capital equal to $3500 and variable costs are estimated to be 1⁄2Q2 – 50Q. Write the equations for total cost, average total cost, and marginal cost.

c. Calculate the profit-maximizing price and output for the firm.

d. Calculate the firm’s profits.

e. Graph the curves representing the firm’s demand, marginal revenue, marginal cost, and average total cost. Show the firm’s profits on the graph. Label all axes and curves and identify the intercepts and profit-maximizing output and price.

f. Suppose the firm acquires information allowing it to sell to each customer at exactly the price the customer is willing to pay for the units purchased. What are the firm’s output and profits?

g. Indicate in the graph in part e the effect on consumer surplus and producer surplus when the firm uses the pricing strategy described in part f.

h. Suppose a regulatory agency requires the firm to set its price at the competitive level. What are the firm’s price and output? Calculate the firm’s total revenue, total cost, and profits. What is the effect on consumer surplus (compared to the monopolist’s profit- maximizing price and output)?

i. Suppose the regulatory agency instead requires the firm to sell at price = average cost. What are the firm’s price and output (in approximate values)? What are the firm’s profits? What is the effect on consumer surplus (compared to the profit-maximizing price and output)?

Answer 1