1. Assume for simplicity that a monopolist has no cost of production and faces a demand curve given by !Q = 150−P
a. Calculate the profit maximizing price-quantity combination for this monopolist. b. Calculate the monopolist’s profits.
c. Suppose a second firm enters the market. Let q1 be the output of the first firm and q2 the output of the second.
Market demand is now given by: q 1 + q2 = 150 − P!
Assuming that this second firm also has no costs of production, use the Cournot model to determine the profit maximizing level of production for each firm as well as the market price.
d. Calculate each firm’s profits.
e. How do the results from (a), (b), (c) and (d) compare to the price and quantity that would prevail in a perfectly competitive market?
P=Q=75
Profit (monopoly)= 5,625
P=q(for each firm)=50
Profit (cournot)= 2500
P=0, Q=150, profit = 0. Monopolist can extract more consumer surplus, and it results in more transactions than the oligopoly with two firms.