Question

Consider Amazon AWS as the only known company providing cloud computing service in the world. The demand for cloud computing service is given by P = 100 − Q, and the marginal revenue in this monopoly market is MR = 100 − 2Q. The marginal cost of providing this service is MC = 5Q. There are no fixed costs and ATC=3Q. Show your work on all parts.

a. Find the monopoly output and price set by Amazon AWS.

b. Calculate Amazon’s profits.

c. Draw the demand, MR and MC curves on the graph. Show the deadweight loss due to Amazon’s monopoly power on the graph, and calculate its value.

Answer 1

Ans

a) In a monopoly, the profit maximizing output is when MR = MC

=> 100 - 2Q = 5Q

=> Q = 100/7 units = 14.3 units

At Q = 100/7, from the demand function,

P = 100 - 100/7 = $600/7 = $85.71

b) For profit of the firm,

ATC (at Q = 100/7) = $300/7

Thus, profit = (P - ATC)*Q = (600/7 - 300/7)*100/7 = $30000/49 = $612.25

c) If the firm had produced at the efficient level, then,

P = MC

=> 100 - Q = 5Q

=> Q = 100/6 = 16.67 units units and P = $83.34

So, deadweight loss is the area of the triangle ABC = 0.5*(85.71 - 71.5)*16.67 = $236.9.

*Please don’t forget to hit the thumbs up button, if you find the answer helpful.

Thank You