Consider whether a firm with fixed costs is subject to market failure by following the stepsbelow:
a. Suppose there are N people who might consumer a product sold by a monopoly firm. Each person hasdemand of q = 2 -P, so total demand for this product is Q= Nq = 2N- NP, or P = 2 - Q/N.Graph this market demand curve.
b. For this marketdemand curve, the equation for marginal revenue is MR = 2-2Q/N. Add thismarginal revenue curve to your graph.
c. Suppose themarginal cost of production is zero. What quantity would aprofit maximizing monopolistproduce? What price would it charge? Show this on your graph.
d. Ignoring fixedcosts, calculate profits, consumer surplus, and total surplus at this profit maximizingprice. (These will be functions of N).
e. Suppose now thatbefore making this product, the firm has to pay fixed costs of research anddevelopment equal to $3,000,000. How large does N need to be before theprofit-maximizing firm chooses to pay the fixed cost and produce this product? How largedoes N need to be before it is socially efficient to pay the fixed cost?