Answer the following questions using a monopolist?s revenue and cost graph below: Answer the following questions using a monopolist½s revenue and cost graph below: a. Show the profit-maximizing price and quantity. b. Show the producer and consumer surplus c. Show the deadweight loss from monopoly. What is the implied competitive equilibrium? d. Is the firm operating at a profit or a loss (how do we know)? If it½s operating at a loss, should it produce or shut down? Solution (a) Monopolist produces where marginal cost meets marginal revenue. Monopolist charges price where this output cuts the demand curve. The profit maximizing output is 45 with price $12. (b) Producer surplus is area above supply curve and below price line. Consumer surplus is area above price line and below demand curve. Consumer surplus = 0.5 x (16-12) x 45 = $90 producer surplus = 12 x 45= $540 (c) Cometitive equilibrium is where demand meets supply curve. This is at 75 quantity and price $10. Dead weight loss is the are abetween ocmpetitve equilibrium and monopo0ly equilibrium. This is the traingle. =0.5 x (12-10) x (75-45) = 30 dead weight loss (d) The firm is operating at loss. Since the price is below average total cost, the firm is at loss. The firm should shut down but not exit the industry since price is not below average total cost. .

1. Answer the following questions using a monopolist?s revenue and cost graph
below:
Answer the following questions using a monopolist½s revenue and cost graph below: a. Show
the profit-maximizing price and quantity. b. Show the producer and consumer surplus c. Show
the deadweight loss from monopoly. What is the implied competitive equilibrium? d. Is the firm
operating at a profit or a loss (how do we know)? If it½s operating at a loss, should it produce
or shut down?
Solution
(a) Monopolist produces where marginal cost meets marginal revenue. Monopolist charges price
where this output cuts the demand curve.
The profit maximizing output is 45 with price $12.
(b) Producer surplus is area above supply curve and below price line. Consumer surplus is area
above price line and below demand curve.
Consumer surplus = 0.5 x (16-12) x 45 = $90
producer surplus = 12 x 45= $540
(c) Cometitive equilibrium is where demand meets supply curve. This is at 75 quantity and price
$10. Dead weight loss is the are abetween ocmpetitve equilibrium and monopo0ly equilibrium.
This is the traingle.
=0.5 x (12-10) x (75-45) = 30 dead weight loss
(d) The firm is operating at loss. Since the price is below average total cost, the firm is at loss.
The firm should shut down but not exit the industry since price is not below average total cost.