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March 25, 2017

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A monopolist has a constant marginal and average cost of $10 and faces a demand curve of QD = 100 - 10P. Marginal revenue is given by MR=100-.20P.

a. Calculate the monopolist's profit maximizing quantity, price, and profit.
b. Now suppose that the monopolist fears entry, but thinks that other firms could produce the product at a cost of $15 per unit (constant marginal in average cost) and that many firms could potentially enter. How could the monopolist attempt to deter entry, and what would the monopolist quantity and profit be now?
c. Should the monopolist try to deter entry by setting a limit price?

  • Economics/Algebra - ,

    I know the answer for a.

    Profit maximizing quantity: 450
    Profit maximizing price: $55
    Profit: $20,250

  • Economics/Algebra - ,

    Calculate the monopolist’s profit-maximizing quantity, price, and profit.
    Q=450, P=55, Profit=

    c. Now suppose that the monopolist fears entry, but thinks that other firms could produce the product at a cost of $15 per unit [constant marginal and average cost] and that many firms could potentially enter. How could the monopolist attempt to deter entry, and what would be the monopolist’s quantity and profit be now?.
    One way to limit entry would be to lower the price of the product since the average cost is $10 to make and the fear is that a firm can make it on a average cost of $15. Then make the product sell for less than what it takes on average for the other firm to make it.

    c. Should the monopolist try to deter entry by setting a limit price?
    Yes, by setting a limit price you can deter other firms form coming in on the market. This is done by lowering the price so that others do not want to enter into the market.

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