utical has a monapoly on biachemical ulcer treatment drug is givenby p=500-20) a
ID: 1120256 • Letter: U
Question
utical has a monapoly on biachemical ulcer treatment drug is givenby p=500-20) and the MR-50040, Suppose the et demand curve firm faces TC-10+80° and MC= 1602. ist's profit-maximizing output and price? What are the m b. What is the equation for the total revenue curve. c. What is the profit of the drug? d. What is the output and price if the drug is under perfect competition market with the same demand and cost curves? Calculate the deadweight loss of monopoly relative to the competitive outcome and show graphically e. . Refer to question 3. Suppose that the government levies an excise tax of $20 per dose on the monopolist. a. What would happen to Othe monopolist output and price? b. Calculate the change in consumer and producer surplus and show them graphically What is the governments tax revenue? What is the change in the deadweight loss? c. d.Explanation / Answer
A monopolist aims to maximise his output. The profit maximising condition for a monopolist is MR=MC.
( PROFIT= TR-TC
therefore, (d/dq)profit = MR-MC
setting (d/dq)profit = 0 we get MR=MC )
a. Here, MR = 500-4Q and MC = 16Q
Therefore profits are maximised where 500-4Q = 16Q
Or, 500 = 20Q or, Q= 25.
Thus, the profit maximising output for the monopolist is 25 units.
and the profit maximising price will be 500-2Q or, 500-2(25) = 450.
b. Total revenue is given by P*Q
Therefore, TR = Q(500-2Q) = 500Q-2Q^2
c. The profit of the drug = TR - TC
= (500 - 2*25^2) - (10+8*25^2)
=11250 - 5010
= $6240
d. Firms under the perfect competition take price to be given in the market i.e. they are price takers. The demand curve is the average revenue curve is horizontal. thus, MR=P. Hence the profit maximising copndition in a perfect competition is given by, P=MC.
Here P= 500-2Q and MC = 16Q
Thus, for profits to be maximized, 500-2Q=16Q
Or, Q= 27.778 units.
and P = 500 - 2(27.778) = $444.444
Thus the price and output under perfect competition will be $444.444 and 27.778 units respectively.
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