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Calculating optimal output, price and consumer expenditure

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Suppose a perfectly competitive industry cab produce roman candles at a constant marginal cost of $10 per unit. Once the industry is monopolized, marginal costs rise to $12 per candle because $2 per candle must be paid to lobbyists to ensure that only this firm receives a roman candle license. Suppose the market demand for roman candles is given by Qd = 1,000 - 50P and marginal revenue MR = 20 - Q/25.

a) Calculate the perfectly competitive and monopoly price and output.
b) What is the total consumer expenditures on this product under monopoly and under perfect competition?

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Solution Summary

Solution describes the steps to calculate optimal price, output and consumer expenditure in case of perfect competition and monopoly.

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a) Calculate the perfectly competitive and monopoly price and output.

Case 1-Perfectly competitive market

Marginal Cost=MC=$10
Marginal Revenue=20-Q/25
In perfectly competitive market, firms sets its output such that ...

Solution provided by:
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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