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Monopco faces the market demand curve for widgets. This market demand is Q=20-p (which we could rearrange to get p=20-Q). This means that if p=20, then Q=0; if p=19, Q=1; if p=18, Q=2, etc. The marginal cost of production (MC) is always $4.The average total cost of production (ATC) is also always $4.
(a) [6 marks] Set up a table showing price, quantity, total cost and total revenue (TR) for price descending from 20 to 0. Use this to calculate marginal revenue (MR). Note, for MR you need to go ‘between’ each of the q-levels .
(b) [6 marks] Draw a diagram showing Monopco’s situation, including its demand, MR, MC and ATC curves.
(c) [6 marks] Show how many widgets Monopco will produce, and the price it will charge for each widget. Calculate the firm’s profits and the DWL it creates. Show these areas on your diagram.
(d) [4 marks] Recalculate the DWL that would occur if instead MC=ATC=0 for all widgets. Is this DWL higher or lower than in part (c)?
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