Question

A monopoly that faces a demand curve given by Q = 1-P and has a constant marginal cost as 0.2.

1.

In this situation, the deadweight loss from monopoly is:

	a.	0.12.
	b.	0.08.
	c.	0.40.
	d.	0.16.

2. In this situation the monopoly's profit maximizing output level is:

	a.	0.7.
	b.	0.2.
	c.	0.4.
	d.	0.5.

Answer 1

1)

Q = 1 - P

P = 1 - Q

MR = 1 - 2Q

MC = 0.2

Monopoly profit maximizing condition

MR = MC

1 - 2Q = 0.2

1 - 0.2 = 2Q

0.8 = 2Q

Q = 0.4

P = 1 - 0.4

= 0.6

For competitive market

P = MC

1 - Q = 0.2

1 - 0.2 = Q

Q = 0.8

P = 1 - 0.8

= 0.2

Dead weight loss due to monopoly

DWL = 1/2(PM - Pc)(Qc - QM)

= 1/2(0.6 - 0.2)(0.8 - 0.4)

= 1/2(0.4)(0.4)

= 0.08

(b) is correct option

2)

P = 1 - Q

MR = 1 - 2Q

MC = 0.2

MR = MC

1 - 2Q = 0.2

1 - 0.2 = 2Q

0.8 = 2Q

Q = 0.4

Profit maximizing output level is 0.4

(c) is correct option