httpsnewconnectmheducation commowconnecthtml 40 00 Fair Ret

?? https://newconnectmheducation commow/connect.html 40 00 Fair Retun 30.00 MC Mon (PQ) 20001 10.00 5.00 8.00 12.00 15 MR 20 00 Output reset Instructions: Use only whole numbers from the graph above. b. Calculate profit in a monopoly situation. c. Colculate the profit that will occur when regulators set a price that results in a socially optimal outcome. d. Calculate profit that will occur when regulators set a price that results in a fair return. Prev3 of 3 Next

Solution

b. Profit maximization in monopoly situation

Monopolist is a price Maker. He will determine the quantity of output that will maximize revenue. The monopolist faces a downward sloping demand curve because he can sell more if he lowers the price. The profit maximizing price and output is where marginal revenue equals marginal cost, then it is extended to the market demand curve to determine what market price corresponds to that quantity.

The monopoly profit equals (P-ATC) x Q.

P=$22

ATC=$12

Q= where MR=MC=8

Profit =($22-$12) x 8=$80.

C. Socially optimal outcome

The socially optimal quantity is at the intersection of MC and demand curve.

Q= MC=D= 12

Price at MC=D=$18

ATC=$13

Profit ($18-$13) x 12=$60

D. Fair return outcome

The fair return outcome is at the intersection of ATC and demand curve

Q= ATC=Demand curve= 15

Price at ATC=D=$15

ATC=$15

Profit=($15-$15)x 15=$0

Since P=ATC, the monopolist makes zero economic profit.