Monopoly Answer Guide

1.P = 100 - 2 Q; MR = 100- 4Q; MC = 16; FC = 200

a. set MR = MC: 100 - 4Q = 16 --> 4Q=84 --> Q = 21

b. P = 100 - 2(21) = 58

c. to answer this you need to determine if economic profits are positive; find TR = PQ and subtract TC = 16Q + 200: TR = 58(21) = 1218; TC = 16(21) + 200 = 536; Profit = 682.

d. a and b no change; what about c? Does monopoly power guarantee positive profits in the long run?

e. no change; recall this does not affect marginal cost

f. now, MC = 16 + t = 16 + 4 = 20 = 100 - 4Q ...... Q = 20; P = 60.

2. P = 5.5 - 0.0001Q so MR = 5.5 - 0.0002 Q

a. MR = 5.5 - 0.0002 Q = 1.5 = MC ...... Q = 20000; P = 3.5

TR = 3.5 (20000) = 70000 and TC = 1.5 (20000) + 500 so Profit = 39500

b. set P = MC as in competition: 5.5 - 0.0001 Q = 1.5; Q = 40,000

consumer surplus would go up; draw a diagram and determine how much

c. always, to max revenues set MR = 0; solve for Q: 5.5 - 0.0002Q = 0; Q = 27500 and

P = 2.75

d. just plug the numbers into the E = - b (P/Q). Hint monopoly elastic; rev max one and for part b inelastic.

3. P = 11 - Q so MR = 11 - 2 Q and MC = 6

a. MR = 11 - 2 Q = 6 = MC; Q = 2.5 and P = 8.5

b. DRAW a diagram; CSm = .5 (2.5) (2.5) = 3.125

c. Set P = 11 - Q = 6 = MC; Q = 5 and P = 6

d. deadweight loss = 3.125

e. draw a diagram