(Monopoly) Any firm in the market for tiddlywinks has constant marginal cost, MC = 30, and no fixed costs. The market’s demand curve is given by D(p) = 4000−40p.
(a) [2 points] (Perfect Competition) If there is perfect competition, what are the equilibrium price and total quantity sold in the market, p∗ and Q∗? Does a firm in the market earn any (nonzero) profits?
(b) [2 points] Now consider a monopolist. What is the monopolist’s marginal revenue function, MR(Q)? (c) [2 points] What is the profit maximizing quantity for the monopolist, Qm, and the resulting price, pm? At this price and quantity, what is the monopolist’s profit?
(d) [2 points] Draw a graph depicting the monopoly outcome for this market and label the deadweight loss resulting from the monopoly, DWL. What is the dollar value of DWL? Is this large or small, relative to the competitive equilibrium’s total surplus, TS∗? Briefly explain. (e) [2 points] What is the elasticity of demand, ε∗, at the competitive equilibrium price and quantity? What is the elasticity of demand, εm, at the monopoly outcome?
