Hi k9queen!!
Because there is only one firm selling the good, this case is a
monopoly.
The formula to calculate MR (Marginal revenue) is change in total
revenue divided by change in quantity:
MR = Delta TR / Delta Q
QUANTITY PRICE TOTAL REVENUE MR
----------------------------------------------
1 38 38 38
2 36 72 34
3 34 102 30
4 32 128 26
5 30 150 22
6 28 168 18
7 26 182 14
8 24 192 10
9 22 198 6
10 20 200 2
11 18 198 -2
12 16 192 -6
13 14 182 -10
14 12 168 -14
15 10 150 -18
16 8 128 -22
17 6 102 -26
18 4 72 -30
19 2 38 -34
20 0 0 -38
---------------------------------------------------------
B)If MC is constant at $10, then what output level will the firm
produce (if the firm produces at all?) Explain.
The monopolist will produce where marginal revenue (MR) equals
marginal cost (MC).
In effect, MR is the addition to total revenue from selling one more
unit and MC is the addition to total cost from producing one more
unit, then if MR = $11 and MC = $10, to produce an additional unit
will pay the profit maximising firm; if MR = $10 and MC = $11, the
firm will not produce an additional unit because doing that will lower
the profits.
So we conclude that the rule is:
MR = MC
So if MC is $10 then looking the chart we have that the output level
is 8 units.
-----------------------------------------------------------
C)Why is the output level the firm produces not socially optimal?
Explain and illustrate your answer.
Monopoly leads to less production than is socially optimal. This is
because the price under monopoly exceeds marginal cost (24>10). Then
monopolist optimal outcome is below the socially optimal output level.
The marginal revenue curve is twice as steep as the demand curve:
Demand curve is P = a - b.Q , then its slope is -b
Total revenue = P.Q = Q.(a - bQ) = aQ - bQ2
Marginal Revenue is derivative of TR:
MR = d(PQ) / dQ = a - 2bQ then its slope is -2.b = 2.(Demand curve's
slope)
Profit max set MR = MC
For a competitive firm, price equals marginal cost:
P = MR = MC ;
For a monopoly firm, price exceeds marginal cost:
P > MR = MC
The monopolist restricts quantity in order to obtain a higher price,
and hence increase profits. When a monopolist set the output level by
equating MR and MC, he is not selling at that price:
The monopolist’s selling price is on the demand curve, vertically
above the point of intersection of MR and MC. Thus, the monopolist’s
price will be higher than the pure competitor’s, in the first case it
exceeds marginal cost and in the second it is equal to MC. Then the
monopolist optimal outcome is below the socially optimal output level
that correspond for this MC in the pure competition case. As a result
the monopolist produces less than the socially efficient quantity of
output.
Under monopoly, higher prices and lower output leads to a loss of
welfare to society as a whole.
For reference about this point:
"Monopoly" by Chris Rodda:
http://www.cr1.dircon.co.uk/TB/2/monopoly/monopoly.htm
"Compare Monopoly to Competition": Just download this file and open it
with Powerpoint.
https://academic.wsc.edu/faculty/chparke1/monpc.ppt
I hope this helps you, if you need further assistance on this
question, please use the clarification feature to ask for it, I will
gladly respond your request.
Best regards.
livioflores-ga |
