Kalamazoo Competition-Free Concrete (KCC) is a local monopolist of ready-mix con
ID: 1192069 • Letter: K
Question
Kalamazoo Competition-Free Concrete (KCC) is a local monopolist of ready-mix concrete. Its annual demand function is
Qd = 28,000 - 200P,
where P is the price, in dollars, of a cubic yard of concrete and Q is the number of cubic yards sold per year. Its marginal cost is $20 per cubic yard, and it faces an avoidable fixed cost of $200,000 per year.
What is its profit-maximizing sales quantity and price if the monopolist were to produce?
Q = units.
P = $.
b. What is the deadweight loss from monopoly pricing?
$.
Explanation / Answer
Qd = 28000 – 200P
P = 140 – Qd / 200
MR = 140 – Qd / 100
MC = 20
At profit maximization in monopoly
MR = MC
140 – Qd / 100 = 20
Qd / 100 = 140 – 20
Qd = 120 x 100 = 12000 units
P = 140 – Qd / 200 = 140 – 60 = $80
To calculate the deadweight loss we have to calculate the producer surplus from the point of marginal cost pricing to the monopolistic pricing.
At marginal cost pricing P = MC = 20
Qd = 28000 – 200 x 20 = 24000 units
The deadweight loss is simply the area between the demand curve and the marginal cost curve over the quantities 12000 to 24000. Hence the deadweight loss is (24000 – 12000) x (80 – 20) = $720000
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