Sub: Economics Topic: Micro Economics

Question:

Monopolist's output and residual demand curve

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A potential entrant can produce at the same cost as the monopolist illustrated in the figure
below. The monopolist’s demand curve is given by Dm and its average cost curve is
AC…….continues Please see the attached file

Solution:

a. What level of output does the monopolist have to produce in order for the entrant to face
the residual demand curve, DR?

Monopolists have to produce 36 units in order for the entrant to face the residual demand
curve. This is because the Marginal Cost curve will intersect with Average coat curve when the
Average Cost curve is at minimum. From the below diagram, the Average cost curve is
minimum at the price level is 140. So the Monopolist output would be 36 units.

b. How much profit will the monopolist earn if it commits to the output that generates the
residual demand curve, DR? At the 36 units of output, the monopolist profit would be the
rectangle ABCD.

c. Can the monopolist profitability deter entry by committing to a different level of output?
Explain.

** End of the Solution **

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