Additional Practice Monopoly (2010 Final Exam)

1. Dong Dong is the only firm making ping pong balls in Nirvana which is a small economy closed to world
trade. The following equations describe the monopolists demand, marginal revenue, total cost, and
marginal cost:
P = 10Q

Demand:

M R = 102Q

Marginal Revenue:

T C = 3 + Q + 0.5Q2

Total Cost:

MC = 1 + Q

Marginal Cost:

where Q is quantity and P is the price measured in dollars.

(a) How many ping pong balls are produced by the monopolist? At what price are they sold? What is
the monopolists profit?
ANSWER: The monopolist will choose to produce at quantity where M R = M C.
10 2Q =

1+Q

3Q =

Q =

Hence, the price will be P = 10 3 = 7. The firms profit will equal to

TR TC

7 3 (3 + 3 + 0.5 32 )

21 10.5

10.5

(b) One day, the Chief Executive of Nirvana decrees that henceforth there will be free trade of ping
pong balls at the world price of $6. Dong Dong is now a price taker. What happens to domestic
production of ping pong balls? To domestic consumption? Does Nirvana export or import ping pong
balls? What is now Dong Dongs profit?
ANSWER: Facing the world market, the firm no longer enjoys the monopoly power. It has to take the
price as given. The firm will choose to produce at quantity where P = M C.
6

Q =

1+Q
5

The domestic consumption will be Q = 10 6 = 4. Since the production is higher than the domestic
consumption, the country will export ping pong balls. The firms profit will equal to
TR TC

6 5 (3 + 5 + 0.5 52 )

=
=

30 20.5

7.5

(c) Suppose that the world price was not $6 but happened to be exactly the same as the domestic price
without trade. Would anything have changed when trade was permitted? Explain briefly.
ANSWER: Facing the world market, the firm no longer enjoys the monopoly power. It has to take the
price as given. The firm will choose to produce at quantity where P = M C.
7

Q =
1

1+Q
6

The domestic consumption will be Q = 10 7 = 3. Since the production is higher than the domestic
consumption, the country will export more ping pong balls. The firms profit will equal to
TR TC

6 7 (3 + 6 + 0.5 62 )

42 27

15

The firm will earn more profit than before trade liberalization. Thus, the monopoly would like to see a
trade liberalization if the world price is higher than the domestic price without trade.