Question 3 -- Monopoly This question is based on the diagram below, which depict

Question

Question 3 -- Monopoly

This question is based on the diagram below, which depicts the market situation of a monopoly. Each quantity required in the question should be expressed in terms of P0 , P1, P2, P3, P4, P5, Q0 , Q1, Q2, Q3, Q4, and Q5. Assumes further that curves A, B, and C are linear (i.e. straight

a) Identify the following curves in the diagram: (i) the demand curve, (ii) the curve for average total cost of the monopoly, (iii) the curve for the marginal cost of the monopoly, (iv) the curve for the marginal revenue of the monopoly.      

b) Identify the following different quantities of output, (i) the highest quantity that can be sold without losing money, (ii) the quantity that may bring in as much revenue as possible, (iii) The quantity that may earn as much profit as possible

c) Write down the formulae, in terms of the Q’s and P’s in the diagram, for (i) monopoly profit, and (ii) the deadweight loss.     

d) Suppose that, for some reason, the monopoly is currently producing Q2, indicate and explain the effect of an output increase on monopoly profit and on consumer surplus.    

e) Explain how the diagram would be different if this is a natural monopoly

Explanation / Answer

ans a) curve A represents demand curve

curve B represents marginal revenue curve

curve C represents marginal cost curve

curve D represents average totalcost curve

ans b) highest quantity that can be sold without losin money is q4, the quantity that bring more revenue p3q3

tha qunatity that may earn as much profit is q1 because maximum profit

ans c) monopoly profit in terms of  P-(ATC MULTIPLY Q)i.e (p2-p1) multiply q1

weight loss ATC-P i.e p1-p0q0

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