Suppose a monopolist faces a demand curve for its output of P = 300−Q. This means that the marginal revenue curve of the monopolist is M R = 300 − 2Q. Assume that the marginal cost of production is constant and equal to $40.
a) Write down an expression for the monopolists profit, as a function of the quantity of output it produces.
b) If the monopolist must charge the same price for all units of output that it sells (that is, if the monopolist is a single price monopolist), what level of output will maximise the monopolists profit? What price will the monopolist charge? What is its level of profit?
c) If this were a competitive market instead of a monopoly, what level of output would be produced and what price would be charged? What is the level of profit for firms if it were perfectly competitive?
d) Draw a diagram of demand, marginal revenue, and marginal cost that illustrates your answer to part b). From this work out consumer surplus and producer surplus.
e) Draw the same diagram but for your answer to c), the case of the competitive market. From this work out consumer surplus and producer surplus. How much deadweight loss is there from the monopoly? Why?