4. Company X is a monopolist in the doorstop industry. Its cost function is TC 1

Question

4. Company X is a monopolist in the doorstop industry. Its cost function is TC 100-5Q+ o' and demand is P = 55-20. What price should Company X set to maximize profit? What output does the firm produce? How much profit and consumer surplus does CompanyX generate? What would output be if Company X acted like a perfect competitor and set P MC? What profit and consumer surplus would then be generated? What is the deadweight loss from the monopoly power in part (a)? Suppose the government is concerned about the high price of doorstops and sets maximum price at $27. How does this affect price, quantity, consumer surplus, and profit? What is the resulting deadweight loss? Suppose the government now sets the maximum price at $23. How does this decision affect price, quantity, consumer surplus, profit, and deadweight a. b. c. d. e. loss?

Explanation / Answer

Ans D

New Price set by Government is $27 then Quantity will be 27=55-2Q and 2Q=28, Q=14

At Price 27 Revenue=P*Q=27*14=378 & Cost=100-5Q+Q^2=100-5(14)+(14)^2=226

Profit=$152

When P<MC then

DWL=1/2(P-MC)*(Quantity when Price is 27 - QUantity when Perfect competition)

Dead Weight Loss=1/2(27-23)*(15-14)=$2

Consumer Surplus=1/2(55-27)(14-0)=196

Ans E)

New Price set by Government is $23 then Quantity will be 23=55-2Q and 2Q=32, Q=16

At Price 23 Revenue=P*Q=23*16=368 & Cost=100-5Q+Q^2=100-5(16)+(16)^2=276

Profit=$92

Marginal Cost=2Q-5=2(16)-5=27

Dead Weight Loss=1/2(23-27)*(16-14)=-$2

Consumer Surplus=1/2(55-27)(14-0)=196

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