MONOPOLY PROBLEMS
Problem 1. Marginal revenue and Monopoly Decisions
We assume that a natural monopoly produces widgets at a constant marginal cost
of $ 300.
Given the following table showind the quantity demanded by consumers
at every price, explain what the monopoly's OUTPUT should be in order to
maximize its profits.
What will it set the PRICE of widgets at?
How much profit will it make?
| QUANTITY | PRICE | REVENUE | MARGINAL REVENUE |
| 0 | $ 10.00 | ---- | ---- |
| 1 | $ 9.50 | ---- | ---- |
| 2 | $ 9.00 | ---- | ---- |
| 3 | $ 8.50 | ---- | ---- |
| 4 | $ 8.00 | ---- | ---- |
| 5 | $ 7.50 | ---- | ---- |
| 6 | $ 7.00 | ---- | ---- |
| 7 | $ 6.50 | ---- | ---- |
| 8 | $ 6.00 | ---- | ---- |
| 9 | $ 5.50 | ---- | ---- |
| 10 | $ 5.00 | ---- | ---- |
| 11 | $ 4.50 | ---- | ---- |
| 12 | $ 4.00 | ---- | ---- |
Problem 2
Given the data in problem 1, draw the DEMAND and MARGINAL REVENUE curves;
show the monopoly output and profit on the graph.
Answer to Problems 1 and 2
Problem 3
A natural monopoly has a constant marginal cost of $ 200 and faces a demand
curve given by the equation:
P = 500 - 5 Q
Find its output, price and profit.
Answer to Problem 3
Problem 4
The kumquat industry is characterized by increasing marginal
costs; we know that in the industry
MC = 5 Q
The demand for kumquats is given by the equation:
P = 1000 - 10 Q
A. Monopoly case
What will be the output and price of kumquats if the industry is monopolized?
What are monopoly profits?
B. Competitive case
What will be the output and price of kumquats if the industry is competitive?
Are competitive firms making an operating profit? If so, how much?
C. Welfare effects
Use your answers to A and B to compare the welfare effects of monopoly and
competition.
Answer to Problem 4
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