Question

Suppose that the (inverse) market demand curve for a new drug, Adipose-Off, designed to painlessly reduce body fat, is represented by the equation $P=100-2 Q$, where $P$ is the price in dollars per dose and $Q$ is the annual output. (The marginal revenue curve is thus given by the equation $\mathrm{MR}=100-4 Q$.) Suppose also that there is a single supplier of the drug who faces a marginal cost, as well as average cost, of producing the drug, equal to a constant $$\$ 20$$ per dose. What are the monopolist's profit-maximizing output and price? What is the resulting deadweight loss relative to the competitive outcome?

   Suppose that the (inverse) market demand curve for a new drug, Adipose-Off, designed to painlessly reduce body fat, is represented by the equation $P=100-2 Q$, where $P$ is the price in dollars per dose and $Q$ is the annual output. (The marginal revenue curve is thus given by the equation $\mathrm{MR}=100-4 Q$.) Suppose also that there is a single supplier of the drug who faces a marginal cost, as well as average cost, of producing the drug, equal to a constant $$\$ 20$$ per dose. What are the monopolist's profit-maximizing output and price? What is the resulting deadweight loss relative to the competitive outcome?
 
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Microeconomics: Theory and Applications
Microeconomics: Theory and Applications
Edgar K. Browning,… 12th Edition
Chapter 11, Problem 14 ↓

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Step 1

To find the profit-maximizing output, set the marginal revenue (MR) equal to the marginal cost (MC). The marginal revenue curve is given by MR = 100 - 4Q, and the marginal cost is constant at MC = 20. \[ MR = MC \] \[ 100 - 4Q = 20 \] \[ 80 = 4Q \] \[ Q = 20  Show more…

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Suppose that the (inverse) market demand curve for a new drug, Adipose-Off, designed to painlessly reduce body fat, is represented by the equation $P=100-2 Q$, where $P$ is the price in dollars per dose and $Q$ is the annual output. (The marginal revenue curve is thus given by the equation $\mathrm{MR}=100-4 Q$.) Suppose also that there is a single supplier of the drug who faces a marginal cost, as well as average cost, of producing the drug, equal to a constant $$\$ 20$$ per dose. What are the monopolist's profit-maximizing output and price? What is the resulting deadweight loss relative to the competitive outcome?
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