Question

Monopoly faces a demand P=24-q and MC=12. The firm can develop a cost-saving innovation that would...

Monopoly faces a demand P=24-q and MC=12. The firm can develop a cost-saving innovation that would lower its costs to MC=8. How much would monopoly gain from innovating?

  1. 32
  2. 4
  3. 20
  4. 28
  5. 22
  6. none of the other answers are correct
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Homework Answers

Answer #1

Profit is maximized where marginal revenue is equal to marginal cost

Marginal revenue can be calculated from the demand function by doubling the coefficient of Q

Demand Function

P = 24 - q

Marginal Revenue

MR = 24 - 2q

Equating both MR and MC

24 - 2q = 12

q =6

Price can be calculated from the demand function

P = 24 - q

P = 24 - 6

P = 18

Total Revenue = Price x Quantity

Total Revenue = 18 x 6

Total Revenue = 108

When MC is 8

Equating both MR and MC

24 - 2q = 8

q =8

Price can be calculated from the demand function

P = 24 - q

P = 24 - 8

P = 16

Total Revenue = Price x Quantity

Total Revenue = 16 x 8

Total Revenue = 128

Hence the total revenue will increase by $20 (128 - 108)

The monopoly gain from innovating is $20

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