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Monopoly University of The People ECON 1580 Introduction To Economics Prof. Ogochuku Fisher September 30, 2024

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64 views4 pages

Monopoly University of The People ECON 1580 Introduction To Economics Prof. Ogochuku Fisher September 30, 2024

Uploaded by

Abdul Aziz
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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University of The

People
Bachelor of Computer
Science
Monopoly

University of the People

ECON 1580 Introduction to Economics

Prof. Ogochuku Fisher

September 30, 2024

“Monopoly: A firm that is the only producer of a good or service for which there are no close substitutes and

for which entry by potential rivals is prohibitively difficult” (Rittenberg et al, 2009).

a) How much will the firm produce?

Explanation:

Given the demand function as follows: P = 500 - 10Q

Marginal cost (MC) = $100

The profit maximization condition for a monopolist is MR = MC.

TR = P*Q

TR = 500Q - 10(Q^2)

Marginal revenue (MR) is determined by taking the first-order derivative of the TR function.

MR = 500 - 20Q

Setting MR = MC and solving for Q, we get:

500 - 20Q = 100

So, Q = 20

Therefore, the firm will produce 20 units.

b) How much will it charge?


Plugging the value of Q into the market demand function, we get:

P = 500 - 10(20) = $300

Therefore, the firm will charge $300.

c) Can you determine its profit per day? (Hint: you can; state how much it is.)

Profit = Total Revenue – Total Cost

Let’s start by calculating each component separately.

Total Revenue TR = Quantity × Price = 20 × 300 = $6000

Total Cost = Total Variable Cost + Total Fixed Cost. In this case, the fixed cost is zero, and thus:

Total Cost = Total Variable Cost.

Total Variable Cost TVC = Average Variable Cost AVC × Quantity Q = Marginal Cost MC ×

Quantity Q.

Thus: Total Cost TC = MC × Q = 100 × 20 = $2000.

Profit = TR – TC = 6000 – 2000 = $4000.

The company’s profit per day is $4000.

Total Revenue per day is $6000: Total Cost is $2000: The company’s profit per day is $4000.

d) Suppose a tax of $1,000 per day is imposed on the firm. How will this affect its price?

A $1,000 per day tax will have no effect on the firm's price because a $1,000 per day tax is a fixed cost

that the firm must pay every day even if it does not produce anything, as it does not depend on the output

produced. Since equilibrium is established by equating marginal revenue (MR) with marginal cost (MC),

and this fixed cost does not affect marginal cost, its price and output will remain unchanged.

e) How would the $1,000 per day tax its output per day?

A tax of $1,000 per day does not affect the firm's daily output because the tax is a constant.

f) How would the $1,000 per day tax affect its profit per day?

P=TR-TC

P= (15 x 300) - (100 x 15) = 4500 -1500 = $3000


The decrease in profit is (4500 - 1500) = $3000

g) Now suppose a tax of $100 per unit is imposed. How will this affect the firm’s price?

With a tax of $100 per unit, the total cost becomes:

MC = MC + t = 100 + 100 = 200

Putting MR = MC, we get:

500 - 20Q = 200

So, Q = 15

Thus, the tax reduces the quantity sold.

Putting the value of Q into the demand function, we get:

P = 500 - 10(15)

P = $350

Thus, there will be an increase in the price of goods sold.

h) How would a $100 per unit tax affect the firm’s profit maximizing output per day?

Profit maximization occurs when MC=MR

Marginal cost at a $100 tax is MC=100=TC=MC x Q = 100 x 15=1500

Therefore, marginal revenue = $1500

Marginal total product = 1500 / 100 = 15 units

Therefore, the output is reduced to 15 units

i) How would the $100 per unit tax affect the firms profit per day?

Profit = TR -TC = (350 x 15) = $5250

Profit = 350*15 - 200*15 = $2250

Hence, the profit is reduced to $2250


Reference: -
 Khan Academy. (2019, March 15). Monopolies vs. perfect competition | Microeconomics | Khan
Academy [Video]. https://www.youtube.com/watch?v=PgDrR2wj_Jc
 Khan Academy. (2019, March 15). Economic profit for a monopoly | Microeconomics | Khan
Academy [Video]. https://www.youtube.com/watch?v=PEFEnss--mU
 Rittenberg, L. & Tregarthen, T. (2009). Principles of Economics. Flat World Knowledge.
https://my.uopeople.edu/pluginfile.php/1894522/mod_book/chapter/527749/
PrinciplesOfEconomicsChapter01.pdf

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