Question

A monopolist faces a demand curve P= 24 – 2Q, where P is measured in dollars per unit and Q in thousands of units and MR=24 – 4Q. The monopolist has a constant average cost of $4 per unit and Marginal cost of $4 per unit. a. Draw the average and marginal revenue curves and the average and marginal cost curves on a graph. b. What are the monopolist’s profits-maximizing price and quantity? c. What is the resulting profit? Calculate the firm’s degree of market power using the Lerner index. d. A government regulatory agency sets a price ceiling of $10 per unit. i. What quantity will be produced and what will the firms profit be? 1. What happens to the degree of monopoly power (Lerner Index)? ii. What price ceiling yields the same level of output as a competitive equilibrium? 1. What is the firm’s degree of monopoly power at this price (Lerner Index)? 2.What is the profit at this price?

Answer 1