Using a graph, show under what condition the monopoly operates—does not shut down—in the long run. Discuss your result in terms of the demand curve and the average cost curve at the profit-maximizing quantity.
Answer to relevant QuestionsWhy might a monopoly operate in any part (downward sloping, flat, upward sloping) of its long-run average cost curve, but a competitive firm will operate only at the bottom or in the upward-sloping section? The inverse demand function a monopoly faces is p = 10Q–0.5. The firm’s cost curve is C(Q) = 5Q. What is the profit-maximizing solution? A monopoly has an inverse demand function given by p = 120 – Q and a constant marginal cost of 10. Calculate the deadweight loss if the monopoly charges the profit-maximizing price.Using a graph, explain why a firm might not want to spend money on advertising, even if such an expenditure would shift the firm’s demand curve to the right.Proposals to reduce patent length for drugs are sometimes made, but some critics argue that such a change would result in even higher prices during the patent period as companies would need to recover drug development costs ...
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