Suppose that market demand for a good is Q = 480 - 2p. The ...

[mp14]

Suppose that market demand for a good is Q = 480 - 2p. The marginal cost is MC = 2Q. Calculate the deadweight loss resulting from a monopoly in this market.
 
  What will be an ideal response?

Question 2

If a competitive firm is in short-run equilibrium, then
 
  A) economic profits equal zero.
  B) economic profits will be positive.
  C) economic profits will be negative.
  D) All of the above are possible in the short run.

[millet]

Answer to Question 1

First, solve for the competitive equilibrium by substituting MC for p in the demand equation and solve for Q. Q = 480 - 2(2Q) = 480 - 4Q. Rearranging yields 5Q = 480, or Q = 96. Since price equals marginal cost, p = 2(96 ) = 192. Second, solve the monopoly output by setting marginal revenue equal to marginal cost. Rewrite the demand curve as p = 240 - 1/2Q so that MR = 240 - Q. Setting MR = MC yields 240 - Q = 2Q or Q = 80. For this quantity, a monopoly can charge a price of 200 and the marginal cost at that output level is 160. The deadweight loss is (200 - 160 )  (96 - 80 )/2 = 320.

Answer to Question 2

D

[mp14]

Thank you

[millet]

Happy to help you