Question - Suppose a monopolist can purchase Labor at a price w = 1 and can purchase Capital at a price r = 9. The monopolist's production function is given by Q = L1/2K1/2. The demand facing the monopolist is given by P = 78 - 6Q.
a) Illustrate the above situation using a graph. Your graph should include the Demand Curve, the Marginal Revenue curve, the Marginal Cost curve, and you should clearly identify the Monopoly Price and Quantity, and the Perfectly Competitive Price and Quantity. Make sure your graph is drawn neatly and accurately, and is correctly labeled.
b) What is the value of the deadweight loss that results from this monopoly?
c) What value does the Lerner Index take when the firm is a monopolist?