You are the manager of a business in a monopoly market with the following invers

Question

You are the manager of a business in a monopoly market with the following inverse demand function

p= 30 - 1/10p

In addition, assume your production technology is described by the total cost function

C(q) = 500 + 10q

a) Determine the optimal quantity to produce (qM), the price you should charge for your product (pM), and compute the profit of your business.

b) Provide an intuitive explanation of market power. What is market power? How do we measure the market power of a business? Compute the market power of your business.

please show all the working

Explanation / Answer

In a monopoly market, equilibrium is where MR = MC

30 - (1/5)q = 10

q* = 100

p* = 20

Profit = p*.q* - C(q*)

=100(20) - 500 - 10(100)

=500

b) Market power is the power of a monopolist to charge a price above the level prevailing in perfect competition.

Market power = (P-MC)/P

= (20-10)/10 = 1

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