A single firm monopolizes the entire market for widgets and can produce at constant average and marginal
Question:
A single firm monopolizes the entire market for widgets and can produce at constant average and marginal costs of AC 5 MC 5 10.
Originally, the firm faces a market demand curve given by Q 5 60 2 P.
a. Calculate the profit-maximizing price–quantity combination for the firm. What are the firm’s profits?
b. Now assume that the market demand curve shifts outward (becoming steeper) and is given by Q 5 45 2 0.5P.
What is the firm’s profit-maximizing price-quantity combination now? What are the firm’s profits?
c. Instead of the assumptions of part (b), assume that the market demand curve shifts outward (becoming flatter)
and is given by Q 5 100 2 2P.
What is the firm’s profit-maximizing price–quantity combination now? What are the firm’s profits?
d. Graph the three different situations of parts (a), (b), and
(c). Using your results, explain why there is no real supply curve for a monopoly.
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