Question

1) Suppose that a single price monopolist faces a linear, downward sloping demand curve and a total cost curve that includes the following data points:

Price	Quantity	Total Revenue
8	0
7	1
6	2
5	3
4	4
3	5
2	6
1	7
0	8

Quantity	Total Cost
0	2
1	4
2	6
3	8
4	10
5	12
6	14
7	16
8	18

a. What is the profit maximizing condition for a monopolist? In order to maximize profits, what price would this monopolist charge? How many units would they produce? How much profit will the firm earn?

b. Use a graph to illustrate the monopoly outcome from part (a). Be sure to include and label all relevant curves. Use your graph to identify (label on your graph) and calculate the total dollar value of the deadweight loss under the monopoly outcome.

c. Suppose the firm expands output by 1 unit beyond the quantity you found in part (a). Calculate the price effect and the quantity effect for the firm as a result of this expansion in output. Would the firm want to expand output in this way? Briefly explain.

d. Suppose the firm reduces output by 1 unit from the quantity you found in part (a). Calculate the price effect and the quantity effect for the firm as a result of this reduction in output. Would the firm want to reduce output in this way? Briefly explain.

Answer 1