1

Additional Worked Example from UOL for Perfect Competition.

6. Using the competitive model: a worked example

Assume that the raspberry growing industry in Scotland is perfectly competitive, and
each producer has a long-run total cost curve given by TC = 144 + 20q + q
and it's marginal cost by MC = 20 + 2q.
The market demand curve is Q = 2,488 − 2P.
(Q is the demand in the market, q is the output of the individual firm).

a) What is the long-run equilibrium price in this industry?

In the long-run, the price, PLR = minimum ATC.

TC 144
ATC = = + 20 + q
q q
When MC = AC, AC is minimum.
 
∴20 + 2q = 
+ 20 + q Ÿ q = 
Ÿ q = 12.
144
Hence, ATC = + 20 + 12 = 44 Ÿ ? P = 44.
12

b) How many active producers are in the raspberry growing industry in a long-run
competitive equilibrium?

At P = 44, Q = 2,488 − 2P Ÿ Q = 2,488 − 244 = 2,400.

So now we know that market demand is 2,400 and that each profit maximising
competitive firm produces 12 units.
,
Therefore the number of firms in the market must be 
= 200.
 2

c) Illustrate diagrammatically the long-run equilibrium of the firm and the industry.
Your diagram does not have to be drawn to scale but should contain the relevant
information.

The diagrams are shown below. Make sure that you label the axes and any curves or
lines in the diagram as well the solution values of prices and quantities. This should
all be obvious but it is surprising how many examination answers fail to provide these
important pieces of information.

Figure 7.3: Long-run equilibrium of the firm and the industry.

 3

Additional Worked Example from UOL.

3. Using the monopoly model: a worked example.
The (inverse) demand curve faced by a monopolist is given by P = 210 − 4Q.
(a) Suppose the monopolist has constant marginal cost equal to 10 (MC = 10).
Use the method shown above to find the monopolist’s marginal revenue and, using
that, calculate the monopolist’s profit maximising output, price and total revenue.

The MR curve has the same vertical intercept but twice the slope of the demand
curve. ?MR = 210 − 8Q.
The monopolist maximises profit when MR = MC Ÿ 210 − 8Q = 10.
?Q = 25 into P = 210 − 4Q Ÿ P = 210 − 425 = 110 Ÿ # = $$%.
TR = PQ = 11025 = 2,750 .

(b) Now suppose that the monopolist’s MC rises to 20. Calculate the new Q, P, TR.
Similarly, when MC = 20, MR = MC Ÿ 210 − 8Q = 20.
?Q = 23.75 into P = 210 − 4Q Ÿ P = 210 − 423.75 Ÿ # = $$(.
TR = PQ = 11523.75 = 2,731.25 .

(c) Suppose now that the demand curve given above refers to a perfectly competitive
industry in which each firm has a constant marginal cost of 10.
What is the industry price, output and total revenue?

When the industry is perfectly competitive, the industry supply curve is horizontal at
P = MC Ÿ # = $%. At this price, the demand curve P = 210 − 4Q implies
10 = 210 − 4Q. ?Q = 50 and TR = PQ = 1050 = 500.

(d) Now in this competitive industry suppose that the MC for each firm rises to 20.
What is the new P, Q and TR for the industry.
Similarly, when MC = 20, the industry supply curve is horizontal at P = MC
?# = 0%. At this price, the demand curve P = 210 − 4Q implies 20 = 210 − 4Q
?Q = 47.5 and TR = PQ = 2047.5 = 950.

(e) Compare and comment on the change in TR for the monopoly and the
competitive industry when MC increases from 10 to 20.
When MC increases from 10 to 20 the monopolist’s TR falls and the perfectly
competitive industry TR increases. Why the difference?
The monopolist always operates on the elastic portion of its demand curve because
MR is positive. So, an increase in price when demand is elastic reduces the
industry’s TR. A monopolist will never produce along the inelastic portion of its
demand curve as MR is negative.
 4

At the competitive output, on the other hand, for the industry as a whole the
demand curve is inelastic (you can check this by calculating the elasticity or by
substituting the competitive output into the MR equation and noting that MR is
negative, implying inelastic demand).
MR = 210 − 8Q Ÿ At Q = 47.5, MR = 210 − 847.5 = −170
Hence, an increase in price when demand is inelastic increases the industry’s TR.
However, for each firm in the competitive industry MR is positive and equal to price.
 5

BLOCKS 7. Monopoly

Monopoly
3.1 : Features of monopoly
3.2 : Revenue curves for monopoly
3.3 : Profit-maximizing output determination according to MR = MC rule

3.4 : Short-run equilibrium of monopoly

3.5 : Long-run equilibrium of monopoly
3.6 : Monopolist only produces on the elastic portion ( |PED| > 1 ) of demand curve

3.7 : The measurement of monopoly power

3.8 : Natural monopoly

3.9 : Evaluation of monopoly

3.10: Price Discrimination

 6

Monopoly

Features of monopoly
• Strictly defined, a monopoly (i.e. pure monopoly) is a market situation where only one firm
exists in the industry and controls the entire market of a single commodity

Selling unique • The product produced by a monopoly has no

product
close substitutes. In other words, the product is
unique.
There is no distinction • Since there is only one firm under monopoly
between the firm and and that single firm constitutes the whole
industry industry

Monopolist is a price • Monopolist can set the price of the product it is

setter/ price maker selling since it has no competition in the
industry.
• However, the monopolist can only determine
either the price or the quantity sold. It cannot
control both price and quantity. This is because
it cannot control demand.
Strong barriers to • There must be some forms of barriers to entry
entry of potential that hinder potential entrants from entering the
rivals/competitors industry and to compete with the monopoly
(e.g. high set up cost, monopolisation of
resources, brand loyalty, legal protection,
control over retail outlets, economies of scale
and etc).
 7

Revenue curves for monopoly

The monopoly faces the downward sloping market demand curve. Hence, it can only
↑Q by ↓P. It can either set price or output but not both.

Let the Demand or AR function be P = 20 − 2Q

Then, TR = P x Q = 20 − 2QQ = 20Q − 2Q
45
MR = 4
= 20 − 4Q Ÿ the slope of MR curve is twice the slope of the demand
curve.
When MR > 0, an increase in Q → TR↑
When MR < 0, an increase in Q → TR↓
Hence when MR = 0 at output = 5, TR is at the maximum.

P
20

MR D or AR : P = 20 − 2Q
4 2
• Q
0 5 10
TR

TR
5 Q
 8

Profit-maximizing output based on the MR = MC rule

To maximise profit, a monopoly will produce until MR = MC.
P

MR1 MC
•
MR2
• MC5
•
C
•
•
• MR5
• MC2
MC1 MR

1 2 Q* 5 Q
4

• If MR > MC, then the additional revenue received from producing the next unit is
greater than the additional cost of producing it. Thus, there is a still additional profit
to be made by increasing output.
• If MR < MC, then the additional revenue received from producing the next unit of
output is less than the additional cost of producing it, so it should reduce output to
increase profits.

 Therefore, profit is maximised when MR = MC. From the diagram, the profit
maximising output is Q* = 4.

Short-run equilibrium of monopoly

A monopolist is the only seller in the industry hence it has market power.
P

MC
ATC
PM •
π

ATCM •
•
A D = AR
MR
Q
QM

A monopolist maximise profit by producing until MR = MC at point A.

Hence the profit maximising output is QM and price, PM.
The profit is the green shaded area = ( PM - ATCM ) QM.
 9

Long-run equilibrium of monopoly

• The monopolist can earn normal profit or supernormal profit in the long run.
• Barriers to entry of new firms make it possible for the monopolist to make
supernormal profit in the long run.

Monopolist only produces on the elastic portion (|PED| > 1) of the demand
curve.
67 = # 8 9:;<; # => ? @ABCD=EB E@ 8 , @E< ;F?GHI; # = $% − 8.
J5 J JK JK
MR = =P +Q =P+Q
J J J J
 JK J K  JK 
MR = P L1 + K J
M. As price elasticity, PED = JK 
, ? K J
= KRS
1 1
∴ MR = P U1 + V = P U1 − V
PED |PED|

MR = P L1 − |KRS|
M.
Since it is only profitable to produce when MR > 0, it follows that:
  
P L1 − |KRS|
M>0 → 1− |KRS|
>0 → 1 > |KRS|
? |PED| > 1 Elastic demand.
Therefore, a monopoly will only produce those output on the elastic part of the
demand curve as MR is positive.
It will not produce those output along the inelastic portion of the demand curve as MR
is negative.

The measurement of monopoly power

To maximise profit, a monopoly follows the MR = MC rule.

Since MR = P L 1 − |KRS|
M, we can rewrite the profit-maximising rule as:
 Z[  K\ Z[ 
PL 1 − |KRS|
M = MC → 1− = |KRS|
→ = |KRS|
K K
K\ Z[ 
The Lerner Index, L = = |KRS|
K
It is the mark-up of price over MC and is used to measure the power of a monopoly.
L lies between 0 to 1. A bigger L means the firm has more pricing power.
 For a perfectly competitive firm, P = MC and therefore, L = 0 which implies no
monopoly power.
 For a monopoly, P > MC. This implies 0 < L < 1.
• The Lerner Index also shows that the more elastic is demand (bigger |PED|),
the smaller is the monopoly power.
 10

The Inefficiency of a monopoly (deadweight loss)

P

MC = S under Perfect Competition

ATC
PM •A
C
PC DWL •

•
M MR D = marginal benefit
Q
QM QC

Productive efficiency is achieved when a firm is producing its output at the lowest
possible cost. This condition will be fulfilled as long as the firm is producing on the
ATC curve which reflects the lowest cost to produce each level of output.

Allocative efficiency is achieved when a firm is producing the output where P = MC.
P = MC implies that resources are allocated efficiently to their best uses.
Allocative efficiency is achieved only in a perfectly competitive industry because the
equilibrium occurs where the market MC (in Perfect Competition, S = ∑ MC) cuts the
demand curve which implies MC = P.
Hence, the perfect competitive output QC is allocative efficient as P = MC.
There is no deadweight loss (DWL).

For a monopolist, profit maximisation requires the monopoly to produce where

MR = MC. Hence the equilibrium output QM is inefficient as P > MR and ∴ P > MC.
The profit maximising price, PM is higher and output lower compared to a perfectly
competitive industry. Specifically, a monopolist maximises profit by restricting output.
As QM is lower than the competitive output, QC, it leads to deadweight loss given by
the shaded area, ACM.

Evaluation of a monopoly versus perfect competition.

• Productive efficiency is achieved in both industries as all firms are producing on its
ATC curve which reflects the lowest cost to produce a certain output.
• However, a monopolist, unlike perfect competition, does not achieve allocative
efficiency because P > MC at the profit-maximising output.
 11

A Natural monopoly
• A natural monopoly enjoys huge economies of scale (EOS).
Its long-run average cost (LATC) is always diminishing as output increase, hence
the LMC curve will always lie below it.
• An industry is a natural monopoly when a single firm can supply a good or service
to an entire market at a lower cost than if the market is supplied by two or more
firms. This is due to the substantial EOS enjoyed by the monopolist.
If the market has more than one firms, each producer will face a higher average
total cost, leading to higher prices than that under a single producer.
P

PM B
•
A
• H
PA • LATC
M
•
• C
•
PC LMC
MR D = MB
QM QA QC Q

 To maximise profit, the monopolist will produce at QM where MR = LMC.

As a result, it leads to deadweight loss = area BCM
 The government can regulate the monopoly by imposing:
1. Marginal cost pricing – To achieve allocative efficiency, the monopolist is
required to set price equal to marginal cost (P = MC) and hence must produce
at point C and therefore output = QC which is allocative efficient. The price is
Pc.
However, producing Qc leads to losses = (H – C) Qc as shown by the green
shaded area. Therefore, the government will need to subsidise the monopoly
to offset the losses otherwise the monopolist will have to shut down
eventually.

2. Average cost pricing – The monopolist is required to set price equal to average
total cost (P = LATC) and hence producing at point A to achieve the
breakeven output, QA. Hence, the monopolist need not shut down. However,
this is not allocative efficient as PA > MC. Nonetheless, the deadweight loss is
much smaller than the unregulated one.
 12

Example
The market demand of a monopolist is P = 100 – Q. It has zero fixed cost and
constant marginal cost of 10.
(a) Find the equilibrium price, output, and profit of the monopolist.
P
100
CS A
55 •
Profit
C
10 • • MC = ATC = 10
M

MR D = P = MB
45 90 100 Q

TR = PQ = 100 − QQ = 100Q − Q .

d TR
MR = = 100 − 2Q. MC = 10
dQ
Setting MR = MC to maximise profit Ÿ 100 – 2Q = 10
?Q = 45 and P = 100 − Q Ÿ P = 55.
π = P − ATCQ = 55 − 1045 = 2,025

(b) Find the consumer surplus, producer surplus and the deadweight loss.
$
de = D:; f<;;B D<=?BfI; = $%% − g(g( = $0hi. (
0
#e = D:; jIA; <;CD?BfI; = (( − $%g( = 0, %0(
Under perfect competition, the equilibrium is at point C where MC cuts the
demand curve and therefore price = 10.
From the demand function P = 100 – Q, when P = 10, output, QPC = 90.
Hence, the non-discriminating monopolist deliberately produces less (QM = 45) to
maximise profit. As a result, it leads to deadweight loss = triangle ACM.

∴Deadweight loss =  90 − 4555 − 10 = 1012.5
 13

Price Discrimination (PD)

• Price discrimination occurs when a monopoly charges different prices to different
consumers for reasons not associated with difference in costs.
• There 3 types of price discrimination.

First-degree PD (Perfect PD)

First degree PD is also known as perfect price discrimination. Everyone is charged a
different price based on their willingness to pay.
• In a First-degree PD, the firm charges each consumer up to his willingness to pay
for each unit, resulting in zero consumer surplus and hence greater profit.
• For example, lawyer may attempt to do this since the demand is inelastic for
serious criminal offences.

Example The market demand of a monopolist is P = 100 – Q. It has zero fixed cost
and constant marginal cost of 10.
Find the equilibrium output, price and profit of a monopolist that practices first-degree
price discrimination.
What is the consumer surplus, producer surplus and the deadweight loss?
P
100

Profit
A
10 • MC = ATC

D: P = 100 - Q
90 100 Q

Under first-degree price discrimination, consumer is charged a different price (the

highest price they are willing to pay), so in this special case, the MR curve is also the
demand curve. Hence, the discriminating monopolist will produce at point A where
MR = MC or P = MC and this coincides with the output of a perfectly competitive
industry in the diagram. Hence, there is no deadweight loss.
At point A, P = MC Ÿ 100 − Q = 10, ?Q = 90 and ?P = 100 − Q Ÿ P = 10.

π = TR − TC = [1090 + 90100 − 10] − 1090 = 4,050

CS = 0 and PS = profit = 4,050. Deadweight loss = 0.
The consumer surplus that existed under perfect competition is now entirely captured
by the monopolist.
 14

Second-degree PD (Block pricing)

Second degree PD is also known as quantity discrimination, people who buy different
quantities are charged different prices (e.g. there is a discount for buying in bulk).
• Second-degree PD occurs when the firm practise block pricing charging a high
price for the first block (say the first 100 units) and a lower price for the next
block of another 100 units and a lower price again for the next block of say 200
units.
For example, electricity companies in some countries charge a high price for the
first block of 100 kilowatts and a lower price for the next block of 100 kilowatts.

C A
P1 = 15 •
D E
P2 = 10 B
•

D
100 200 Q
 If the monopoly wants to sell 200 units without PD, it must charge P2 = $10. 
TR0 = P x Q = $10 x 200 units = $2,000. CS0 = Area C + D + E.
 If it can practise second-degree PD by selling the first block (100 units at P1 = $15)
and the second block (the next 100 units at a lower price, P2 = $10), his 
TR1 = ($15 x 100) + ($10 x 100) = $2,500
∴TR rise by 2,500 – 2,000 = 500 (the green shaded area D).
CS1 = Area C + E is smaller than CS0. The monopolist managed to capture area D
from the consumers.
 15

Third-degree PD

• Third-degree PD involves charging different groups of consumers based on certain

characteristic(e.g. adults and children, students and non-students), provided that
the market can be separated.
• The group with inelastic demand will be charged higher price and the group with
elastic demand will be charged lower price.
• Examples include different bus fares for adults and children, and different prices
charged by a firm for the same product in different countries.
• Third-degree PD is much more common than first or second-degree discrimination.

Country 1 Country 2 Monopolist

P P P

MC

P1 • PA •
P2 •
D1 + D2
A B
MC • • MC •
D2
MR1 D1 MR2 MRT
q1 q2 Q0 Q

Profit maximisation implies the monopolist will set:

MR1 = MC for country 1 and ∴produce q1 and sell at P1.
MR2 = MC for country 2 and ∴produce q2 and sell at P2 in Country 2 with a higher
price elasticity of demand.
 16

Example
A monopolist has two customers with the following demand functions:
Demand of customer 1: Q = 70 − P
Demand of customer 2: Q = 110 − P
The monopolist has a constant marginal cost of 10, and no fixed costs.
(a) Suppose the monopolist can engage in third degree price discrimination,
how much will the monopolist produce and what is the price charged to each
customer? What is the profit or loss?

Third degree price discrimination – monopolist charge different prices for different markets.
Customer 1
P = 70 − Q
45o
TR = P Q = 70 − Q Q = 70Q − Q Ÿ MR = = 70 − 2Q
4o

MR = MC Ÿ 70 − 2Q = 10
?Q = 30, P = 40.
π = P − ATCQ = 40 − 1030 = 900

Customer 2
P = 110 − Q
45p
TR  = P Q = 110 − Q Q = 110Q − Q Ÿ MR  = 4p
= 110 − 2Q

MR  = MC Ÿ 110 − 2Q = 10
?Q = 50, P = 60.
π = P − ATCQ = 60 − 1050 = 2,500

Monopolist’s total profit, π5 = π + π = 900 + 2,500 = 3,400

 17

(b) Now suppose the monopolist cannot differentiate between the customers and
must charge everyone the same price.
Calculate the monopolist’s optimal single price, P as well as the quantity sold to each
group of customers. What is the profit or loss?

Q = 70 − P and Q = 110 − P
Aggregate demand, Q = Q + Q Ÿ Q = 70 − P + 110 − P

?Q = 180 − 2P or P = 90 − Q

 
TR = PQ = L90 − QM Q = 90Q − Q
 

dTR
MR = = 90 − Q
dQ
MR = MC Ÿ 90 − Q = 10.

? Q = 80. P = 90 − 
Q Ÿ P = 50.

π = P − ATCQ = 50 − 1080 = 3,200

Q = 70 − P = 70 − 50 = 20
Q = 110 − P = 110 − 50 = 60
Monopolist’s profit, π = 3,200 if it sells to both groups.
If it only sells to the higher demand group, Customer 2, π = 2,500 in part (a).
Hence the monopolist is better off selling to both groups. ? Q = 80 and P = 50
 18

Tutorial 7. Monopoly

Activity SG 7.1
As part of your studies of microeconomics, it is important for you to be able to draw
the cost and revenue curves for a typical monopolist.
a) Reproduce the diagrams below, making note of the key points (the point where
the MC and MR curves cross, the price level the monopolist chooses, and the
average cost at this quantity) and highlighting the monopolist’s profit.
P

MC

AC
PM •
π

ACM •
•
M MR D = AR
Q
QM

(b) Illustrate an increase in demand.

MC

P1 • ATC
P0 •
π
•
ATC0 • B
• D1 = AR1
A MR0
MR1 D0 = AR0

Q0 Q1 Q
Initially, the monopolist will produce Q0 where MR0 = MC and charged P0.
Profit is the green rectangle.
An increase in demand shifts the demand curve to the right from D0 to D1.
It will adjust its output to Q1 where MR1 = MC and charged P1. Profit increases.
 19

(c) Illustrate the effect of a per unit tax (t) levy on a monopolist. Discuss the incidence
of the tax and the impact on the welfare of society.
P
T•
MC1 MC0

P1 B1 ATC1
• A1
P0 • ATC0
• •C
• t
B ••
•
SA
D = P = MB
MR
Q1Q0 QPC Q

Initially, the competitive output is QPC where MC cuts D at point C.

The monopolist will produce less, Q0 where MR0 = MC and charged more, P0.
As a result of underproduction, a deadweight loss = area A1-C-A is generated.
Under a monopolist, CS0 = area T-A1-P0.

A per unit tax (t) shifts ATC0 and MC0 parallel up by t to ATC1 to MC1 respectively.
The monopolist will further reduce its output to Q1 where MR = MC1 and increase
price to P1. Consumers become morse worse off as exemplified by a smaller
CS1 = area T-B1-P1.
As output fell further, the deadweight loss widened to area B1-C-S which implies a
unit tax exacerbates the loss of welfare on society.
 20

Activity SG 7.2
Consider two monopolists in two industries. One is the sole postal service operating
in a country. The other is the sole producer of a certain type of cheese (no-one else
has the technology to produce this cheese).
Which of these do you think faces a more elastic demand schedule?
Draw a rough sketch of the demand, marginal revenue and cost curves for each
industry and examine the gap between the point where MC = MR and the price
chosen by each monopolist. Which firm has greater market power?
Answer:
The cheese producer faces a much more elastic demand curve as there are many
substitutes, as such has less market power. It would have a lower Lerner Index.
A sole postal service operating in a country has no substitutes and the demand is
therefore highly inelastic with greater market power and a higher Lerner Index.

P Cheese P
D = AR
Postal Service
MC MC
P0 •
P0 •
MC0 •
M
MC0 •
MR D = AR D = AR
MR
Q0 Q Q0 Q

Sample examination questions

Multiple choice questions

1. A monopolist faces an (inverse) demand curve given by P = 100 - 2Q.

Marginal cost is constant and equal to 16.
Profit maximisation is achieved when price is equal to:
a) 45
b) 21
c) 58
d) 82
Answer: (c)
P = 100 – 2Q so MR = 100 - 4Q.
MR = MC gives 100 – 4Q = 16. Therefore Q = 21.
When Q = 21, P = 100 – 2(21) = 58.
Therefore, the profit maximising price for this monopolist is 58.
 21

2. A profit-maximizing monopolist sets an output of 100 per day and a price of £20.
Which of the following statements is true?
a. The firm's marginal cost and marginal revenue curves intersect at an output of
100, and the point on its demand curve at this output is at £20.
b. The firm's marginal cost and marginal revenue curves intersect at an output of
100, and the point on its marginal revenue curve at this output is at £10.
c. The firm's marginal cost and average revenue curves intersect at an output of 100,
and the point on its marginal revenue curve at this output is at £20.
d. The firm's marginal cost and average revenue curves intersect at an output of 100,
and the point on its average revenue curve at this output is at £20.
Answer: (a)

3. Assume that the demand for a new software is PQ = 120 − 2Q .

The cost of producing it is CQ = 4Q for a monopolist.
What is the deadweight loss associated with the monopoly in this market?
a. 1682
b. 1566
c. 841
d. 775
Answer: (a)
4[
Monopoly: MR = 120 − 4Q. MC = 4 = 4
MR = MC Ÿ 120 − 4Q = 4 Ÿ ?Q = 29 and P = 120 − 2Q = 62.

PC: P = MC Ÿ 120 − 2Q = 4 Ÿ ?Q = 58 and P = 120 − 2Q = 4.

P
120
M
62 ●

D C
4 ● ● MC
D: P: MB
29 58 60 Q
1
DWLZ = 58 − 2958 = 1,682
2
 22

True/False/Uncertain
For each of the following indicate whether the statements are true, false, or uncertain,
supporting your answer with a brief explanation.

1. Monopolies always imply deadweight losses in the market.

True. To maximise profit a monopolist produce where MR = MC. But MR < P,
∴P > MC which implies that the monopolist is underproducing, resulting in
deadweight loss.

2. A monopoly is never desirable.

False.
For a natural monopoly with significant economies of scale (EOS), QM is higher
than QPC and PM lower than PPC. As a result, the good is better produced by one
single firm than many small firms in such industry with very high fixed cost like
utility company.
P
MC (PC)

PC C M
•
PM •
•
ACEOS
D
•
MCEOS
QC QM Q

3. Monopolists can find the optimal price without knowing the full demand schedule.
False.
First, the optimal price is found by setting MR = MC which gives the optimal
quantity. But MR is derived from the demand function.
Second, the optimal price is found from the demand function which reflects the
maximum price that consumers are willing to pay for each unit.
 23

Long response question

1. A monopolist faces a demand curve P = 120 – 5Q.
The firm faces a constant marginal cost MC = 20.
a. Calculate the profit-maximising monopoly quantity and price.
Use the formula linking MR, P and MC to find price elasticity of demand at this
point in the demand curve.
b. Suppose that all firms in a perfectly competitive equilibrium had a constant
marginal cost MC = 20. Find the long-run perfectly competitive industry price and
quantity.
c. Compare consumer surplus under monopoly versus perfect competition. You may
find it useful to draw a diagram.
d. What is the deadweight loss due to monopoly? Is this the same as the difference
between the two consumer surpluses you calculated in c.?

a. MC = 20. Demand function: P = 120 – 5Q. ?MR = 120 − 10Q

Setting MR = MC Ÿ 120 − 10Q = 20 Ÿ ?Q = 10 and P = 70.


Profit-maximisation implies MR = MC. Since MR = P L 1 − |KRS|
M, therefore
 Z[  K\ Z[ 
PL1− |KRS|
M = MC → 1− K
= |KRS| → K
= |KRS|
P 70
|PED| = = = 1.4 demand is elastic
P − MC 70 − 20

b. P = MC = 20. As P = 120 – 5Q, ?20 = 120 – 5Q Ÿ Q = 20

c. Perfect competition: PLR = 20

P
120

CSK[ = 120 − 2020 = 1000.


C
20 ● PLR = 20
D
20 24 Q
 24

Monopoly
P

120 CSZ = 120 − 7010 = 250.

M
70 ●

D C
20 ● ● MC

10 20 24 Q


d. DWL = Area MDC = 1050 = 250 is less than (CSK[ − CSZ = 750 .