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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
- With the assumption that the firm is a monopolist, calculate the firm’s marginal revenue (MR) curve for this firm. Show the calculation. Diagram is NOT required. (5 marks)
- Calculate and explain the firm’s profit-maximizing output and price? What is the amount of profit for this firm at this level? You need to show the calculation. Diagram is NOT required (5 marks)
- Discuss what would the equilibrium price and quantity level for this firm if the firm is operating in a competitive industry? Diagram is NOT required. (5 marks)
- Critically discuss what would the social gain be if this monopolist were forced to produce and price at the competitive equilibrium? Who would gain and lose as a result from this situation? Draw only ONE diagram. (8 marks)
- Discuss THREE (3) social costs from monopoly power and how the social cost can be redistributed to eliminate the monopoly power in water supply industry. Draw only ONE diagram. (7 marks)
Expert Solution
(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.
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