05 Jun Question 5. A monopolist has a constant marginal
Question
5. A monopolist has a constant marginal and average cost of $10 and faces a demand curve of QD = 1000 – 10P. Marginal revenue is given by MR = 100 – 1/5Q. a. Calculate the monopolist’s profit-maximizing quantity, price, and profit. b. Now suppose that the monopolist fears entry, but thinks that other firms could produce the product at a cost of $15 per unit (constant marginal and average cost) and that many firms could potentially enter. How could the monopolist attempt to deter entry, and what would the monopolist’s quantity and profit be now? c. Should the monopolist try to deter entry by setting
a limit price?
3. Suppose a firm has a constant marginal cost of $10. The current price of the product is $25, and at that price, it is estimated that the price elasticity of demand is −3.0. a. Is the firm charging the optimal price for the product? Demonstrate how you know.
b. Should the price be changed? If so, how?
7. A monopolist sells in two geographically divided markets, the East and the West. Marginal cost is constant at $50 in both markets. Demand and marginal revenue in each market are as follows: QE = 900 – 2PE MRE = 450 – QE QW = 700 – PW MRW = 700 – 2QW a. Find the profit-maximizing price and quantity in each market.
b. In which market is demand more elastic?
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