Question
Transcribed Text
Economics Department
Question 1: Monopoly
The table below provides data on demand and cost conditions for a monopoly firm facing Fixed Costs
equal to $100.00. All monetary figures are in dollars.
Q
P
VC
FC
TR
MR
MC
1
200
100
2
190
175
3
180
225
4
170
265
5
160
310
6
150
360
7
140
420
8
130
510
9
120
595
10
110
685
11
100
780
12
90
880
13
80
985
14
70
1095
1. Determine the firm's best output choice and the price it will set assuming it is a profit
maximizing firm.
2. What are the profits equal to?
3. If the goal was to maximize revenue would it increase output? What would happen to price
Practice P3 Question 2:
The following information refers to the current position of a firm. All monetary figures are in euros.
Q
P
MC
MR
AC
25
190
80
80
150
1. Is this firm a perfectly competitive firm?
2. Is this maximizing its profits?
3. Isit making non-negative profits?
4. Calculate the firm's total revenue.
1
5. Calculate the firm's total cost.
6. Illustrate the current position of this firm.
P1 practice question: Show, using an appropriate diagram, why monopoly worsens income
distribution.
A
S and MC
a
Ro
6
D,AR
or
Quantity
Gm
ac
MR
Tip: The question refers to the transfer of surplus for consumers to producers that occurs when a
competitive industry is monopolized, assuming that the production technology and so MC remain
unchanged.
2
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1. Determine the firm’s best output choice and the price it will set assuming it is a profit-maximizing firm.Ideally, the profit maximization rule states that at a firm should produce at the point where MR equals MC, i.e., MR=MC. In the above table, there is no point where MR=MC, so profit maximization is at the point before MC starts exceeding MR because, after that point, the firm has reached the maximum profit possible at a certain output X and if it produces more units, the profits start to decline. If the firm above is a profit-maximizing firm, the best output choice is 7 units, i.e., where Q=7.
2. What are the profits equal to?
Profits are calculated by subtracting Total Costs (TC) from Total Revenue (TR), i.e., Profit=TR-TC. Total Costs are the sum of Variable Costs (VC) and Fixed Costs (FC). The profits are maximum at output level...
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