Question

2. Monopoly. Suppose the following schedule represents the demand curve for a non- discriminating, single price monopolist:

P Q TR MR

18 0

15 1

12 2

9 3

6 4

3 5

0 6

a. Complete the table.

b. Plot the demand and MR curves below.

c. Explain why the MR of the third unit is less than its price ($9).

d. Calculate the Elasticity of Demand at the price of $12?

e. Label the elastic, unitary elastic, and inelastic segments of the demand curve.

f. On your graph, draw in and label ATC and MC curves. (Construct your own without concern for numerical values.)

g. Show the profit maximizing quantity and price, labeling them Q* and P*.

h. Show the region that represents the profit (or loss) that the firm earns.

i. Comment on the productive and allocative efficiency of your results.

Answer 1

Ans. TR = P*Q

MR = Change in TR/Change in Q

Q. P. TR. MR

0 18 0 -

1 15 15 15

2 12 24 9

3 9 27 3

4 6 24 -3

5 3 15 -9

6. 0. 0. -15

c) As price is decreasing, so, each additional unit will add less to the revenue i.e. marginal revenue will be less than the price for each additional unit.

d) Price elasticity of demand = (1-2)/(15-12) * 12/2 = -2

g) Profit maximizing level of output is given at the level where MR equals MC and price is representated by the demand curve corresponding to the optimal quantity.

h) Monopoly produces less output than the perfect competition and charges more price than perfect competition, so, it is inefficient in both allocative and production sense.

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