A monopolist faces a market demand curve given by Q

A monopolist faces a market demand curve given by

Q = 70 – P:

The monopolist’s marginal revenue function is given by

MR = 70 – 2Q:

a. If the monopolist can produce at constant average and marginal costs of AC = MC = 6, what output level will the monopolist choose in order to maximize profits? What is the price at this output level? What are the monopolist’s profits?

b. Assume instead that the monopolist has a cost structure where total costs are described by

TC = 0.25Q2 – 5Q + 300

and marginal cost is given by

MC = 0.5Q –5.

With the monopolist facing the same market demand and marginal revenue, what price quantity combination will be chosen now to maximize profits? What will profits be?

c. Assume now that a third cost structure explains the monopolist’s position, with total costs given by

TC = 0:333Q3 – 26Q2 + 695Q – 5,800

and marginal costs given by

MC = Q2 – 52Q + 695.

Again, calculate the monopolist’s price quantity combination that maximizes profits. What will profits be?

d. Graph the market demand curve, the MR curve, and the three marginal cost curves from part a, part b, and part c. Notice that the monopolist’s profit-making ability is constrained by

(1) The market demand curve it faces (along with its associated MR curve),

(2) The cost structure underlying its production.


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