Question

Dalia owns a small coffee roasting firm in Manchester. She is in a monopolistically competitive market and so has some market power. The inverse demand function that she faces is given by

P=28 - 0.7 Q

where P is the price per kilo and Q is the kilos of coffee demanded and her total costs are given by

TC = 25 + 5 Q + 0.4 Q^2

(A)How many kilos of coffee should Dalia roast if she wants to maximize her profits? Give your answer to within one decimal place (e.g. 4.1). Make sure you round correctly.

(B)How many kilos would she produce and what price would she charge if the coffee market was perfectly competitive? Give your answer to within one decimal place.

(C)Calculate the social cost (deadweight loss) of Dalia's market power.Give your answer to within one decimal place

Please answer the question (A), (B), and (C)

Answer 1

Solution-

For a monopolistic firm, profits will be maximised at the point where marginal revenue earned on an extra unit of output is equal to marginal cost incurred in producing an extra unit of output.

Case 1- Monopolistically competitive market

A)

Case 2- Perfectly Competitive market

In this case, profit maximisation would occur when price will be equal to marginal cost.

C) Deadweight loss occurs due to loss in efficiency.

Dead weight loss = 17.76 sq units