Question

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

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

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

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

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Answer #1

a.

b. The monopolist's mark up of price on marginal cost in this case above is 1.5. Under perfect competition the equilibrium is at P=marginal cost. Thus the mark up under perfect competion is 0 and the factor of P to marginal cost is 1:1. This is less than a monopoly above. There is no mark up under perfect competition.

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