Question

A monopolist enjoys a monopoly over the right to sell good X on a certain island. He imports X from abroad at a cost of C each and sells at the price P∗ that maximizes profits. One day, the island’s government annexes a neighbouring island and extends the monopolist’s monopoly rights to this island. People on the annexed island have the same tastes and incomes and there are just as many people as on the first. What is the resulting change in monopolists’ price, sales and profit? Note: Demand is downward sloping but non-linear. Explain ALGEBRAICALLY and GRAPHICALLY.

Answer 1

The monopolist keeps his price constant and his sales double.

Step-by-step explanation:

This is because monopolist is already charging a price that maximises his profits and people on the annexed island have same preferences so his demand curve will shift outward with price remaining the same and thus he will sell double the amount than under previous condition.