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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 Preview

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 Summary

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

$2.19