Question

The market demand curve is P = 90 − 2Q, and each firm’s total cost function is

C = 100 + 2q2.

1. Suppose there is only one firm in the market. Find the market

   price, quantity, and the firm’s profit.

2. Show the equilibrium on a diagram, depicting the demand function D (with the vertical and horizontal intercepts), the marginal revenue function MR, and the marginal cost function MC. On the same diagram, mark the optimal price P, the quantity Q, and the average total cost ATC. Illustrate the firm’s profit. Hint: You don’t need to draw the AT C curve.

3. Using the demand function, find the elasticity of demand at the monopoly price and quantity.

4. Verify that the monopoly price and quantity satisfy the monopo- list’s rule of thumb for pricing.

5. What is the monopolist’s factor markup of price over marginal cost?

6. How does the monopolist’s factor markup of price over marginal cost compare to that of a perfectly competitive firm?

Answer 1