Question from Past Microeconomics Qualifying Exam[]
Spring 2004 - Section I, Question four, George Mason University
State first whether the following statement is true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.
In atomistic markets firms will produce quantity (Q*) that sets marginal cost equal to marginal revenue. In a monopolistic market, we cannot predict the quantity (Q*) produced since marginal revenue is not a constant.
Answer[]
False: Monopolists are maximizing agents. With the benign assumption that it is profit that they are maximizing we can determin a point where this is likely to be true to the extent that we understand costs and revenue. In the textbook example where marginal cost was zero the optimal quantity of the monopolist was at marginal revenue equal to zero and at unitary elastic point on the demand curve. When marginal cost is not constant a first derivative of the profit equation will show critical points and the second derivative will show local maxima.
We understand marginal revenue to be the derivative of Total Revenue = Demand curve (average revenue) multiplied by Q. For all expressed demand curves a marginal revenue curve is also available.
- The lost producer surplus is made up for by the gained Consumer Surplus which is transfered to the monopolist.
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