Question

1Suppose the firm is a monopolist. It faces a downward-sloping demand curve, P(Q). If it also has non-negative marginal cost, will it choose a quantity on the demand curve where the price elasticity of demand is less than, greater than, or equal to -1? Explain.

2. Now, consider what will happen if a firm has exactly one competitor in the market. Both firms have identical technologies and cost structures (assuming a constant marginal cost may be helpful), and each chooses how much product (Q) to produce and release to the market. Will the total quantity produced by both firms, if each individually tries to maximize profits, be: (1) The same as the quantity produced by a monopolist; (2) More than that produced under monopoly but less than under perfect competition; or (3) The same as that produced under perfect competition? Explain briefly.

Answer 1

1. Demand is elastic which means price elasticity is greater than 1.

profit is maximised when marginal revenue=marginal cost

thus marginal revenue has to be positive and in order to have positive marginal revenue, Monopolist will produce on the upper half of the demand curve where demand is elastic.

2.ans is B

when two Firm competes in quantities then total market quantity are greater then monopoly outcome but less than perfect competition outcome because perfect competition outcome is P=MC