Suppose that inverse demand is given by:
p(q) = a – bq:
Let the cost of production be given by:
c(q) = cq;
where c < a.
1. Draw a graph with the demand curve, marginal revenue curve, and marginal cost curve.
2. If we assume perfect competition, what is the equilibrium level of output?
3. Compute the total amount of surplus under perfect competition (either using calculus or
4. If instead we have a monopolist producer, what is the equilibrium level of output? Use
calculus to show your derivations.
5. What is the level of surplus with a monopolist?
6. Shade the area on your graph showing the difference in the levels of surplus between the two