Problem set 7

Q1. A monopolist faces a demand curve P = 210 - 4Q and initially faces a constant marginal cost MC = 10.

a) Calculate the profit-maximizing monopoly quantity and compute the monopolist’s total revenue at the
optimal price.
b) Suppose that the monopolist’s marginal cost increases to MC = 20. Verify that the monopolist’s total
revenue goes down.
c) What would be the market price and quantity produced, if the the market was perfectly competitive
instead, and MC = 10?
d) What happens to TR in a competitive market when marginal costs increases to 20?

Q2. Suppose a monopolist faces a demand curve given by P = 120 - 3Q. The monopolist has two plants.
The first has a marginal cost curve given by MC1 = 10 + 20Q1, and the second plant’s marginal cost curve
is given by MC2 = 60 + 5Q2.
(a) Find the monopolist’s optimal total quantity and price.
(b) Find the optimal division of the monopolist’s quantity between its two plants.

Q3. Suppose that a monopolist’s market demand is given by P = 100 - 2Q and that marginal cost is given
by MC = Q/2.
a) Calculate the profit-maximizing monopoly price and quantity. Calculate the Consumer and producer
surplus.
b) Calculate the price and quantity that arise under perfect competition with a supply curve P = Q/2.
Calculate consumer and producer surplus for this case as well.
c) Compare consumer and producer surplus under monopoly versus marginal cost pricing. What is the
deadweight loss due to monopoly?

Q4. Suppose that a monopsonist’s only input is labor and its production function is Q = 5L, where L is the
quantity of labor (expressed in thousands of hours per week). Also suppose that the monopsonist behaves
like a perfectly competitive firm and can sell all the output it wants at a market price of $10 per unit. Lastly,
the supply curve the firm faces for labor is w = 2 + 2L.
How much labor would the monopsonist hire, and what wage rate would it pay, to maximize profit?