Consider The Market For A Good Where The Demand Curve Facing A Firm Who Has Considerable Market Power Is Given By P 80-0.0SQ, The Marginal Revenue Curve Is Given By MR 80-0.1Q, And The Firm’s Marginal Cost Curve Is Given By MC 17+0.02Q. If The Firm Behaves Like A Competitive Firm, Find Equilibrium Price And Quantity. Now Find Consumer And Producer Surplus …

Transcribed Text:Question: Consider the market for a good where the demand curve facing…
Q

Consider the market for a good where the demand curve facing a firm who has considerable market power is given
by P= 80 – 0.05Q, the marginal revenue curve is given by MR = 80 ~ 0.1Q, and the firm’s marginal cost curve is
given by MC = 17 +0.02Q.

a. Ifthe firm behaves like a competitive firm, find equilibrium price and quantity. Now find consumer and
producer surplus.
Ifthe firm behaves like a monopolist, find equilibrium price and quantity. Now find consumer and
producer surplus, and deadweight loss.
Ifthis country opens up its markets and engages in free trade with the rest of the world, explain why we are
more likely to end up with equilibrium in part a as opposed to eq

b,

©.

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Expert Answer

‘vima007 answered this

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a) Under competion demand = supply so we have
80 – 0.050 = 17 + 0.020

63 = 0.070

@ = 900 and P = 80 – 0.05*900 = $35.

CS = 0.5*(80 – 35)*900 = 20250

PS = 0.5*(35 – 17)*900 = 6100

b) As a monopolist we use MR = MC

80 – 0.10 = 17+ 0.020

63=

120

Q = 525, P= 53.75

CS = 0.5*(80 – 53.75)*525 = 6890.625

PS = 0,5*525*(53.75 – 17 + 53.75 – 27,5) = 16537.50

DWL = 0.55375 – 27.5)*(900 – 525) = 4921.875

Monopoly vs Competition
90

900.
0 200 400 600 800 1000 1200 1400 1600 1800

—*Demand —e-MR —*—-MC

©) Bis not likely to be a free trade equilibrium because there will be competition from foreign products
which will drive the price down to competitive level. Hence price will be equal to lowest possible level
under free trade which is the marginal cost.