Question

Using an appropriate graph explain why pricing by a monopolist results in inefficient outcomes. What is the deadweight loss of monopoly?

Answer #1

As seen by the above graph,the monopoly would produce where the MC=MR so that the profit maximizing output for a monopoly is QM and price is PM.

Whereas in perfect competition,the output is set where P=MCso that profit maximizing output is QC and profit maximizing price is PC

The monopoly produces a lower quantity and charges a higher price which causes inefficiency in the market and causes a deadweight loss equal to the shaded region in the graph above and this area is lost which decreases welfare in the market.

Using an appropriate graph, explain how a subsidy to a
monopolist might increase efficiency.

Which of the following is true about monopoly pricing?
(a) A monopolist always prices on the elastic part of its demand
curve
(b) A monopolist always prices by setting MR = AC
(c) A monopolist always prices to maximize deadweight loss
(d) A monopolist always sets P = MC to deter entry

Can a monopolist charge whatever it wants for its product? Why
or why not?
Why is a monopoly associated with deadweight loss?
What is the difference between normal profit and economic
profit?

Using a graph(s) to support your answer, explain why a
monopolist will never produce on the inelastic portion of the
demand curve.

Graph and explain the deadweight loss due to monopoly.

Using graphs, explain why monopolies are socially
inefficient.

A monopolist faces inverse demand p = 40 − 2q and has a marginal
cost of 20.
(a) [20 points] What output will the monopolist produce?
(b) [10 points] What are consumer surplus, monopoly profits, and
deadweight loss?
(c) [10 points] Suppose the monopolist’s costs rise to 90. What
are consumer surplus, monopoly profits, and deadweight loss
now?
Please help to explain part (c).

1. A monopolist producer of a drug Zeta has demand P=270 – 0.2q
and costs C=5000+50q+0.2q^2.
a. Derive the MC, ATC, and MR functions.
b. Derive the profit-maximizing price, quantity, and profit.
Show on a graph.
c. What is the price and quantity if the monopolist loses patent
protection and the industry becomes perfectly competitive? What is
the size of the deadweight loss in monopoly? Show the deadweight
loss triangle in the graph.

You have been hired to advise a monopolist on its pricing and
output policy. An independent research firm has estimated its
elasticity of demand to be –0.5. Would you recommend that the
monopolist change its output? If so, in what direction? Explain
your answer and illustrate with an appropriate graph.

With the aid of graph(s), explain why a monopolist will never
produce on the inelastic portion of the demand curve.

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