Microeconomics, UPNA

Chapter 8. Monopoly and Monopsony

Problems
1. The market demand curve for a monopolist is given by P = 40 - 2Q.
a) What is the marginal revenue function for the firm?
b) What is the maximum possible revenue that the firm can earn?
2. A monopolist operates in an industry where the demand curve is given by Q = 1000 20P. The monopolists constant marginal cost is $8. What is the monopolists profitmaximizing price?
3. A monopolist operates with the following data on cost and demand. It has a total fixed
cost of $1,400 and a total variable cost of Q2, where Q is the number of units of output it
produces. The firms demand curve is P = $120 - 2Q. The size of its sunk cost is $600. The
firm expects the conditions of demand and cost to continue in the foreseeable future.
a) What is the firms profit if it operates and it maximizes profit?
b) Should the firm continue to operate in the short run, or should it shut down? Explain.
4. Assume that a monopolist sells a product with a total cost function TC = 1,200 + 0.5Q2.
The market demand curve is given by the equation P = 300 - Q.
a) Find the profit-maximizing output and price for this monopolist. Is the monopolist
profitable?
b) Calculate the price elasticity of demand at the monopolists profit-maximizing price.
5. A monopolist faces a demand curve P = 210 - 4Q and initially faces a constant marginal
cost MC = 10.
a) Calculate the profit-maximizing monopoly quantity and compute the monopolists total
revenue at the optimal price.
b) Suppose that the monopolists marginal cost increases to MC = 20. Verify that the
monopolists total revenue goes down.
c) Suppose that all firms in a perfectly competitive equilibrium had a constant marginal
cost MC = 10.
Find the long-run perfectly competitive industry price and quantity.
d) Suppose that all firms marginal costs increased to MC = 20. Verify that the increase in
marginal cost causes total industry revenue to go up.
6. A monopolist serves a market in which the demand is P = 120 - 2Q. It has a fixed cost of
300. Its marginal cost is 10 for the first 15 units (MC = 10 when 0 Q 15). If it wants to
produce more than 15 units, it must pay overtime wages to its workers, and its marginal
cost is then 20. What is the maximum amount of profit the firm can earn?
7. Suppose that a monopolists market demand is given by P = 100 - 2Q and that marginal
cost is given by MC = Q/2.
a) Calculate the profit-maximizing monopoly price and quantity.

Microeconomics, UPNA

b) Calculate the price and quantity that arise under perfect competition with a supply
curve P = Q/2.
c) Compare consumer and producer surplus under monopoly versus marginal cost pricing.
What is the deadweight loss due to monopoly?
d) Suppose market demand is given by P = 180 - 4Q. What is the deadweight loss due to
monopoly now? Explain why this deadweight loss differs from that in part (c).
8. The demand curve for a certain good is P = 100 - Q. The marginal cost for a monopolist
is MC(Q) = Q, for Q
30. The maximum that can be supplied in this market is Q = 30,
that is, the marginal cost is infinite for Q > 30.
a) What price will the profit-maximizing monopolist set?
b) What is the deadweight loss due to monopoly in this market?