Question

2. The market for a good has an inverse demand curve of p = 40 – Q and the costs of producing the good are defined by the following total cost function: TC = 100 + 1.5Q2.

a. If this good is produced in a monopoly market, provide a graph of the demand curve, marginal revenue curve and marginal cost curve. Then calculate the equilibrium output and price .

b. Calculate the price elasticity of demand at the equilibrium price and quantity. Does demand have to be elastic or inelastic at the equilibrium market price in a monopoly? Explain your answer

c. Calculate the profits of this monopoly firm at the equilibrium price and output and show the area of profits on your graph. You will need to provide a graph of your ATC curve to do this. (Hint: ATC = MC at the minimum point of ATC.)

d. Calculate the Lerner Index for this company at its equilibrium price. How can you interpret this value? e. Calculate the deadweight loss that is created in this market and discuss what the deadweight loss represents

Answer 1

Lerner's index measure the percentage markup that a firm is able to charge over its marginal cost. Here it is .25 or 25 percent which means firm is able to charge 25 percent more than its marginal cost.