Calculate the deadweight loss due to monopoly

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Reference no: EM13148913

Standard Pricing by a Monopoly Andy owns the sole lawn-mowing business in Springfield, a town of 80 houses. Since all houses have similar sized lawns, Andy charges the same price for any house. Andy’s business is big enough to serve all houses in Springfield each week. Andy’s demand function is: P = 80 – 0.5Q. Given this demand, Andy’s marginal revenue function is MR = 80 – Q. Suppose Andy has no fixed cost and a constant marginal cost of $16 per house. (a) Andy can decide the profit-maximizing quantity Q by setting MR = MC. Find the optimal quantity. (b) What price should Andy charge per house? (c) How much profit will Andy earn? (d) Next, suppose the market is perfectly competitive. Then market equilibrium is determined by P = MC. Use this condition to find the perfectly competitive equilibrium price and quantity. (e) Illustrate the monopoly solution and perfectly competitive solution in a clearly drawn graph. (f) Calculate the deadweight loss due to monopoly.

Reference no: EM13148913

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