2129 - Topic 2 - Part 2 (Monopoly)

If the inverse demand function is p=360-3Q, the marginal revenue function (MR) is:

Answer explanation

MR=360-6Q

If a monopoly chooses the optimal price instead of the optimal quantity, then its profits will be unchanged because the optimal price and quantity yield the same profit.

• True

• False

A firm is a natural monopoly if

• any entrant would have the same costs.

• its profit does not increase with output.

• it has no fixed costs.

• one firm can produce the total output of the market at lower cost than two or more firms could.

The inverse demand curve a monopoly faces is p=130-Q and the firm's cost curve is C(Q)=10+5Q.

The profit maximizing quantity is:

Answer explanation

The profit maximizing price is $67.5.

The firm earns a profit of $3896.25

Following the previous question, the increase in fixed cost

• has no effect on the equilibrium price and quantity, but profit will decrease

• has no effect on the equilibrium quantity, the the equilibrium price increases and profit decreases

• has no effect on the equilibrium quantity, but the equilibrium price increases and profit decreases

• causes the firm to increase both the price and quantity, and profit increases