level of profits that would be realized if resale can be prevented? What level o

Question

level of profits that would be realized if resale can be prevented? What level of profits would the monopolist realize if resale cannot be prevented? Provide the economic basis for your claim. 4. A monopolist faces a market demand (Q) and marginal revenue (MR) curve given by Q-70 - P The monopolist produces at a constant short run average and marginal cost, whereby AC = MC-20 a. If this monopolist wants to maximize profits, how much output should the monopolist produce? b. Calculate the profits, consumer surplus and deadweight loss associated with producing the output level you reported in part a. c. Demonstrate how this monopolist can implement a two-part tariff to increase profits beyond those you reported in part b

Explanation / Answer

Q = 70 - P

P = 70 - Q

TR = 70Q - Q2

MR = 70 - 2Q

MC = 20

a) if he want to maximize its profit, then he produce the output where MR=MC

70-2Q= 20

2Q = 50 or Q = 25

so, monopolist produce 25 units of output.

b) P = 70-25= 45

profits = TR - TC

profits = ( 45*25) - (20*25)

profits = 1125 - 500 = $625

Consumer surplus = 1/2 * P *Q

CS = 1/2 * (70-45) *25 = $312.5

fo deadweight we need to find social optimal output . social optimal output is where P =MC

70-Q = 20 or Q = 50

deadweight loss = 1/2 * P*Q

DL = 1/2 * (45-20) * ( 50-25)

DL = 1/2 * 25 * 25

DL = $312.5

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