1. How does the profit maximization condition for a monopoly differ from that fo
ID: 2495379 • Letter: 1
Question
1. How does the profit maximization condition for a monopoly differ from that for a perfectly competitive firm? How does this difference impact efficiency under each market structure?
2. A perfectly competitive firm has the following fixed and variable costs in the short run. The market price for the firm’s product is $140.
Output FC VC TC TR Profit/Loss
0 $90 $0 90 0 (90)
1 90 90 180 140 (40)
2 90 170 260 280 20
3 90 290 380 420 40
4 90 430 520 560 40
5 90 590 680 720 20
6 90 770 860 840 (20)
a. Complete the table.
b. What level of output should the firm produce to maximize profits?
c. Assume this firm is making a loss when it produces its 7th unit of output. What should the firm do in the short-run?
3. The following table provides market share information about the soft-drink industry.
Do you think the Department of Justice and the Federal Trade Commission would approve a merger between any two of the first three companies listed? Explain.
Do you think this market has barriers to entry? If so, what might they be?
Company Market Share Coca-Cola 37% Pepsi-Co 35 Cadbury Schweppers 17 Other 11Explanation / Answer
the profit maximization condition for a monopoly is that its Marginal Cost should pe equal to Marginal Revenue
While that for a perfectly competitive firm, Price is equal to Marginal Cost is the condition.
For Monopoly, MR =MC
For Perfectly Competitive, P = MC
This difference impact efficiency under each market structure, as their will be a dead weight loss, if a monopoly produces at P =MC and also if a perfectly competitive firm produces at MR= MC .
2. a.
Output FC VC TC TR Profit/Loss
0 $90 $0 90 0 -90
1 90 90 180 140 (40) -40
2 90 170 260 280 20 20
3 90 290 380 420 40 40
4 90 430 520 560 40 40
5 90 590 680 720 20 40
6 90 770 860 840 (20) -20
b. The level of output that firm should produce to maximize profits is Q = 5.
c. Firm will produce only till q=5.
3 I think the Department of Justice and the Federal Trade Commission would not approve a merger between any two of the first three companies listed because this will create monopoly in the market which could use its market dominance and can exploit it .
Yes, since majority of the market share is held by few firms , this shows that there are barriers to entry. These barriers might be High Intial Fixed cost requirement ,Economies of scale and Distribution channel Requirement
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