SCENARIO: HOME MONOPOLIST
A monopolist faces a demand curve given by P = 60 -2Q and has total
Costs given by TC = Q2.Its marginal revenue is MR = 60 - 4Q and its
Marginal cost is MC = 2Q.
Reference: Ref 95
(Scenario: Home Monopolist) Now suppose that the country in which
This monopolist is located decides to engage in international trade.The
World price of the product produced by the monopolist is $10.What is
The firm's profitmaximizing output level?

Question

SCENARIO: HOME MONOPOLIST
A monopolist faces a demand curve given by P = 60 -2Q and has total
Costs given by TC = Q2.Its marginal revenue is MR = 60 - 4Q and its
Marginal cost is MC = 2Q.
Reference: Ref 9­5
(Scenario: Home Monopolist) Now suppose that the country in which
This monopolist is located decides to engage in international trade.The
World price of the product produced by the monopolist is $10.What is
The firm's profit­maximizing output level?

Quizplus · Accepted Answer

When there is international trade, the monopolist will face competition from foreign producers at the world price of $10. In order to maximize profit, the monopolist needs to set its marginal revenue (MR) equal to its marginal cost (MC).

MR = 60 - 4Q    MC = 2Q

60 - 4Q = 2Q

6Q = 60

Q = 10

However, this output level of 10 is greater than the profit-maximizing output level in the absence of international trade. In order to determine the profit-maximizing output level with international trade, we need to find the point where the monopolist's marginal revenue equals the world price of $10.

MR = P = 60 - 2Q

60 - 2Q = 10

2Q = 50

Q = 25

But this output level is also greater than the profit-maximizing output level in the absence of international trade. In order to maximize profit, the monopolist needs to produce where MR = MC and then charge a price based on the demand curve P = 60 - 2Q.

MR = MC

60 - 4Q = 2Q

6Q = 60

Q = 10

So the profit-maximizing output level is Q = 10. Plugging this into the demand equation, we get:

P = 60 - 2Q

P = 60 - 2(10)

P = 40

Therefore, the monopolist's profit-maximizing output level is 10 units and its price is $40 per unit. Its profit can be found by calculating total revenue (TR) and subtracting total costs (TC):

TR = P x Q = 40 x 10 = $400

TC = Q^2 = 10^2 = $100

Profit = TR - TC = $400 - $100 = $300

Therefore, the best choice is A)5 with the explanation provided above.

SCENARIO: HOME MONOPOLIST A Monopolist Faces a Demand Curve Given by P =