Monopoly
1.A monopolistic firm has the short-run marginal cost function,
MC = 20 + 4Q
Where K (capital) is fixed and L (labor)is variable. PK (price of capital) = $10 and
Average Revenue is given by
P= 180-2Q
a. What is the profit maximizing level of Output? Show your work.
b. Write the equation for Total Costs (TC).
c. Write the equation for Total Revenue (TR)
d. Write the expression for the market demand function.
e. What is TC when profit is maximized?
f. What is Total Revenue when profit is maximized?
g. What is Total Profit when profit is maximized?
h. Graph the P, MC, MR, AR and ATC curves in P/Q space to correspond to your answers above. Make sure to label the values (with the numbers you have calculated above) for optimal Q and where the curves intersect optimal Q and where the curves intersect the vertical axis. Make sure to indicate/label profit/loss.
2. What assumption is relaxed on the perfectly competitive market to obtain a monopolistic market?
3. Explain why a monopoly is not socially desirable.
4. What is a natural monopoly? Why do governments allow the operation of natural monopolies? Why do governments impose regulations on natural monopolies?