1. Refer to the graph below to answer the following questions.
a. What is the profit maximizing output and the price that this monopolist charges?
b. What is the amount of total revenue (please mention in terms of area the value)?
c. What is the amount of consumer surplus at the profit maximizing price?
2. Refer to the graph below to answer the following questions.
a. Which areas in the above graph represent producer surplus and consumer surplus at the profit maximizing output and price under perfect competition?
b. In the above figure, if the market was a single-price monopoly rather than perfectly competitive, which area shows the transfer of surplus from consumers to producers because of the monopoly?
3. Suppose that a monopolist has a constant marginal cost of $4, and a fixed cost of $48. Suppose also that the demand function is given by P = 24 – 2Q and the marginal revenue function is MR = 24 – 4Q
a. What is the profit maximizing price and quantity for the monopolist?
b. What is the efficient or competitive price and output?
4. Support Solar Car Inc. is the only firm that produces solar-powered cars. Its inverse demand, marginal revenue, marginal cost curves are given as follows:
P = 180 – Q (inverse demand function)
MR = 180 – 4Q
MC = 2Q
a. Draw the demand curve, the marginal revenue curve, and the marginal cost curve.
b. Suppose that the market structure was initially perfectly competitive. Label the competitive price and quantity in the graph (use the labels and for price and quantity). Calculate the competitive profit maximizing price and quantity. Then calculate the consumer surplus, producer surplus, and welfare when there is perfect competition. [Hints: set the inverse demand function equal to marginal cost function because upward sloping portion on MC is the supply of the competitive firm. Then solve for Q and put it back to the demand equation to calculate the competitive price. Use the formula of a triangle to find the consumer surplus and producer surplus, add those two to get total welfare]
c. Now find the profit maximizing monopoly price and monopoly output (label them in the graph). Then calculate the consumer surplus, producer surplus, and welfare under monopoly. [Hints: MR = MC to find out the profit-maximizing quantity and you will get the price from the demand curve. To calculate the producer surplus, you need to find out the MC at monopoly level of output. The MC is the graph will be determined from the intersection points of MR and MC, extend that to Price axis].
d. Calculate the deadweight loss when the market transforms to a monopoly from perfect competition.