Question

Suppose a monopoly firm has the following Cost and Demand functions: TC=Q2 P=20-Q MC=2Q MR=20-2Q Carefully...

  1. Suppose a monopoly firm has the following Cost and Demand functions:

TC=Q2

P=20-Q

MC=2Q

MR=20-2Q

  1. Carefully explain what the firm is doing and why.
  2. Find the firm’s Profit maximizing Q
  3. Find the firm’s Profit maximizing P.
  4. Find the firm’s Profit.

2. Suppose because of an advertising campaign, which costs $150, the monopoly’s demand curve is: P=32-Q so its MR= 32-2Q

    1. Looking closely at the TC function and the demand curve, explain the effects of the advertising campaign on the equations compared with the equations above in part 1.
    1. Find the firm’s Profit maximizing Q
    1. Find the firm’s Profit maximizing P.
    1. Find the firm’s Profit.
    1. Was the advertising campaign successful? Compare w/ 1. Why?
    1. Do you have any suggestions that might turn the situation around?
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Answer #1

a. A monopoly is a market structure where there is only one seller selling a particular product. And since, he has no competition in the market, the sole objective of the monopolist is to maximise profit at a point where MR=MC. The monopolist might have patent, copyright or license over a product which enables him to be the only single seller of a commodity in an entire market. So even in this question, the given MR and MC will give us the profit maximising price and quantity of the monopolist.

*Please refer to the handwritten notes for the answers to part b,c and d.

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