Consider firm M, a monopolist for an effective herbicide. M’s fixed costs are 7. The marginalcost for producing a unit of the herbicide is MC(Q) = 2. After doing market research, M learnsthat the aggregate demand curve for units of herbicide is D(p) = 10 − p.
What are the profit maximizing price pMon and quantity QMon for firm M?
Mark and label QMon, pMon, producer surplus (PS), consumer surplus (CS) anddead weight loss (DWL) in the figure from
What are M’s profits?
How big is the deadweight loss in this market?
what would be the market price p∗ and quantity Q∗ (in the short run) if firm Mwould be forced to act as a price taker? In this case, would firm M make a loss? If yes, how much of a loss?
What price ceiling should the government impose if it wants to minimize thedeadweight loss under the constraint that it wants firm M at least to break even?
