Question

Suppose an industry demand curve is P = 90 − 2Q and each firm’s total cost function is C = 100 + 2q 2 .

(a) (6 points) If there is only one firm in the industry, find the market price, quantity, and the firm’s level of profit.

(b) (6 points) Show the equilibrium on a diagram, depicting the demand curve, and MR and MC curves. On the same diagram, mark the market price and quantity, and illustrate the firm’s profit. Hint: You don’t have to draw the ATC curve.

(c) (4 points) Using the demand function, find the elasticity of demand at the monopoly price and quantity.

(d) (2 points) Verify that the monopoly price and quantity satisfy the monopolist’s rule of thumb for pricing.

(e) (2 points) What is the monopolist’s factor markup of price over marginal cost?

(f) (3 points) How does the monopolist’s factor markup of price over marginal cost compare to that of a perfectly competitive firm?

Answer 1