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Homework answers / question archive / Table 1 below shows the demand curve facing a monopolist firm for the Malaysian water supply industry
Table 1 below shows the demand curve facing a monopolist firm for the Malaysian water supply industry. The monopolist firm produces output at a constant marginal cost (MC) of RM10.
|
Price (RM) |
Quantity |
|
27 |
0 |
|
24 |
2 |
|
21 |
4 |
|
18 |
6 |
|
15 |
8 |
|
12 |
10 |
|
9 |
12 |
|
6 |
14 |
|
3 |
16 |
|
0 |
18 |
Table 1
(a)
TR = P x Q
MR = Change in TR / Change in Q
| P | Q | TR | MR |
| 27 | 0 | 0 | |
| 24 | 2 | 48 | 24 |
| 21 | 4 | 84 | 18 |
| 18 | 6 | 108 | 12 |
| 15 | 8 | 120 | 6 |
| 12 | 10 | 120 | 0 |
| 9 | 12 | 108 | -6 |
| 6 | 14 | 84 | -12 |
| 3 | 16 | 48 | -18 |
| 0 | 18 | 0 | -24 |
(b)
Profit is maximized when MR>= MC.
When Q = 6, MR > MC but when Q = 8, MR < MC.
So profit is maximized when Q = 6.
P = 18
Profit = Q x (P - MC) = 6 x (18 - 10) = 6 x 8 = 48
(c)
In competitive equilibrium, P >= MC.
When Q = 10, P > MC but when Q = 12, P < MC.
So profit is maximized when Q = 10.
P = 12
(d)
When monopoly produces at competitive equilibrium, it produces higher output at lower price, so the gain in consumer surplus is higher than the loss in producer surplus, causing a net social gain.
In following graph, monopoly profit is maximized at point E where MR intersects MC with price Pm and output Qm. Perfect competitive profit is maximized at point G where Demand intersects MC with lower price Pc and higher output Qc. When monopoly produces at point G, the net social gain is area EFG.
