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Monopoly and Four Firm Concentration Ratio

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1). Suppose the demand curve for a monopolist is Qd = 500 - P, and the marginal revenue function is MR = 500 - 2Q. The monopolist has a constant marginal and average total cost of $50 per unit.
a). Find the monopolist's profit-maximizing output and price.

b). Calculate the monopolist's profit.

c). What is the Lerner index for this industry?

2). The top four firms in Industry A have market shares of 30, 25, 10, and 5 percent, respectively. The top four firms in Industry B have market share of 15, 12, 8, and 4 percent, respectively. Calculate the four-firm concentration ratios for the two industries. Which industry is more concentrated?

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Solution:
1) Suppose the demand curve for a monopolist is Qd = 500 - P, and the marginal revenue function is MR = 500 - 2Q. The monopolist has a constant marginal and average total cost of $50 per unit.

a). Find the monopolist's profit-maximizing output and price.
To maximize profits, a monopolist sets his output in such a way that
Marginal Revenue = ...

Solution Summary

There are two problems. Solution to first problem describes the steps for finding profit maximizing output, price and maximum profit. It also calculates Lerner Index for the industry. Solution to second problem calculates four firm concentration ratios for two industries.

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See Also This Related BrainMass Solution

Industry structure is often measured by computing the Four-Firm Concentration Ratio.

Industry structure is often measured by computing the Four-Firm Concentration Ratio. Suspose you have an industry with 20 firms and the CR is 30%. HOw would you describe this industry? Suspose the demand for the product rises and pushes up the price for the goods. What long-run adjustments would you expect following this change in demand? What does your adjustment process imply about the CR for the industry?

Now consider that the industry has 20 firms but the CR for the industry is 80% instead of 30%. HOw would you describe this industry? What are some reasons why this industry has a high CR while the other industry has a low CR? Is it possible for smaller firms to thrive and profit in such an industry? HOw? Contrast the effects on market efficiency if the dominating firms use a price leadership model versus a contestable markets model.

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