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Monopoly Price-Output Decision

Calvins's Barber Shops, Inc., has a monopoly on barbershop services provided in the south side of Chicago because of restrictive licensing requirements, and not because of superior operating efficiency. As as monopoly, Calvin's provides all industry output.. For simplicity, assume that Calvins's operates a chain of barbershops and the each shop has an average cost-minimizing activity level of 750 haircuts per week, with Marginal Cost= Average Total Cost= $20 per haircut.

Assume that demand and marginal revenue curves for haircuts in the south side of chicago market are:


where P is price per unit, MR is marginal revenue, and Q is total firm output (haircuts).

A. Calculate the monopoly profit-maximizing price-output combination, and the competitive market long-run equilibrium activity level.

B. Calculate monopoly profits, and discusses the "monopoly problem" from a social perspective in this instance.

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The profit-maximizing rule for a monopoly is MR = MC, so we have 80 - 0.0016Q = 20. Solving for Q gives Q = 37500. The price = $80-$0.0008Q = $50.

In the competitive market in the long run, P = MC, so we should expect hair cut price ...

Solution Summary

Monopoly Price-Output Decision