Calvin’s Barber Shops, Inc. has a monopoly on barbershop services provided on the south side of Chicago because of restrictive licensing requirements, and not because of superior operating efficiency. As a monopoly, Calvin’s provides all industry output. For simplicity, assume that Calvin’s operates a chain of barbershops and that each shop has an average cost-minimizing activity level of 750 haircuts per week, with Marginal Cost = Average Total Cost = $20 per haircut.
Assume that demand and marginal revenue curves for haircuts in the south side of Chicago market are
P = $80 - $0.0008Q
MR = $80 - $0.0016Q
Where P is price per unit, MR is marginal revenue, and Q is total firm output (haircuts).
A. Calculate the monopoly profit-maximizing price/output combination, and the competitive market long-run equilibrium activity level.
B. Calculate monopoly profits, and discusses the “monopoly problem” from a social perspective in this instance.