Quiz 19 Monopoly Ans

Quiz 19 Monopoly Ans - the graph below which is 10,000...

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Shomu Banerjee ECON 201 MONOPOLY ANSWERS Trygve is a monopolist with a cost function given by C ( Q ) = 72 + 100 Q + 1 2 Q 2 facing an inverse market demand curve P = 700 - Q. It’s marginal cost is MC = 100 + Q . (a) Find his profit-maximizing price and output combination, P * and Q *, and his profit Π *. From the demand curve, derive the MR (which has the same intercept as the demand and twice the slope): MR = 700 – 2 Q . Setting this equal to MC and solving, we get Q * = 200. Substituting this in the demand function yields P * = 500. Then the total cost is found by plugging Q * into the cost function: 72 + 100(200) + (200) 2 /2 = $40,072. Subtract it from the total revenue of $100,000 to obtain $59,928 . (b) What is the socially desirable level of output? Calculate the deadweight loss arising from this monopoly. The socially desirable level of output is where the MC cuts the demand curve: 100 + Q = 700 – Q , or at Q = 300. The deadweight loss is given by the area of the shaded triangle in
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Unformatted text preview: the graph below which is 10,000 (base = 500-300, height = 300-200). MC Demand 300 200 500 300 Q P (c) Suppose the government decides to tax 30% of the monopolist's profit (a corporate tax ). Will he produce more or less than before? Give an economic explanation for your answer! The imposition of a corporate tax does not change the monopoly’s production decision. The reason for this is that if the monopoly is maximizing profits prior to the tax, any deviation from that quantity-price combination will only serve to lower its profits. So when a corporate tax is imposed, any deviation of output will lead to lower overall profits and the monopolist will take home 70% of its shrunken profits. By continuing to produce what it was producing before, it gets to take home 70% of its initial (higher) profits. Thus corporate taxes are decision-neutral, at least in the short run....
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This note was uploaded on 10/26/2010 for the course ECONOMICS ECON 201 taught by Professor Dr.shomubanerjee during the Summer '07 term at Emory.

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Quiz 19 Monopoly Ans - the graph below which is 10,000...

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