Suppose that the monopoly in Question 2 has a large group of plants. Consider what could happen if each of these plants became a separate firm, and acted competitively. In this perfectly competitive world you can assume that the MC curve of the monopolist becomes the industry supply curve.
(a) What output would be produced in the industry?
(b) What price would be charged in the marketplace?
(c) Compute the gain to the economy in dollar terms as a result of the DWL being eliminated.
Question 2
Imagine we have a monopolist who wants to maximize revenue rather than profit. She has the demand curve P = 72-Q, with marginal revenue MR = 72-2Q, and MC = 12.
(a) Graph the three functions.
(b) Calculate the price she should charge in order to maximize revenue. [Hint: where the MR = 0.] (c) Compare her total revenue with the revenue obtained under profit maximization.
(d) How much profit will she make when maximizing total revenue?