# Microeconomics- Profit maximisation

• May 23rd 2009, 05:04 PM
nikolaucl
Microeconomics- Profit maximisation
Hi
I have an exam this thursday and was wondering if anyone can help me on the following question.
Thank you! (Nod)

Firm A has a monopoly in the local market. The demand is:
(1) QD
= 100- 2P --> P = 50- 1/2Q

The resulting marginal revenue function is MR(Q)= 50-Q

The firm's marginal cost of production is MC(Q)= 5+1/2Q
.

a) Calculate the firm's profit maximizing output.
b) What are the social costs of monopoly power? Calculate the social cost
of the firm's monopoly power.
.
• May 30th 2009, 02:56 AM
phoenicks
I can answer Part A, part B not sure, kinda 4got the social cost from my micro class long time ago.

for part A,
profit maximizing requires MR = MC, ( golden rules in microecon field )
so 50-Q = 5+1/2Q

so Q = 30
• May 30th 2009, 03:06 AM
phoenicks
Okay, now I recall, the social cost of monopoly is the deadweight loss, it's a comparison of state between 2 price setting, 1 is P = MC, which happens under competitive market, which usually means lower price and more quantity of goods: the other MR = MC, which usually means higher price and fewer goods.

so you must 1st draw out the curve, price curve, MR curve and MC curve. then you compute the total revenue area of both price setting P = MC and MR = MC, after computing the difference between this 2 area, you'll get the social cost value.