Question

Consider a monopoly with the following Inverse Demand and Marginal Cost/Supply Curves:

Inverse Demand: P = 40 - 1.5Q

Inverse Supply: P = 4 + 1.5Q

What is the quantity that a monopoly will choose to produce in this market in order to maximize its profit?

Answer 1

A monopoly will choose to produce 8 units of output and charge a price of $28 to maximize its profit.

Step-by-step explanation:

To maximize its profit, a monopoly chooses the level of output where marginal revenue (MR) equals marginal cost (MC). From the given Inverse Demand and Inverse Supply curves, the inverse demand curve is P = 40 - 1.5Q and the inverse supply curve is P = 4 + 1.5Q. Setting MR = MC, we find that 40 - 3Q = 4 + 1.5Q. Solving this equation, we get Q = 8. Substituting this value back into the inverse demand curve, we can find the price: P = 40 - 1.5(8) = 28. Therefore, the monopoly will choose to produce 8 units of output and charge a price of $28 in order to maximize its profit.