The external marginal cost of producing coal is MC_external = 6Q while the internal marginal cost is MC_internal = 4Q.The inverse demand for coal is given by P = 120 − 2Q.How much output would a monopoly produce? A) 10 B) 20 C) 15 D) It cannot be determined because of incomplete information.

Question

Quizplus · Accepted Answer

A monopoly maximizes profit where marginal revenue (MR) equals marginal cost (MC). The inverse demand is P = 120 - 2Q, so total revenue (TR) is P*Q = (120 - 2Q)Q = 120Q - 2Q^2. The marginal revenue (MR) is the derivative of TR, MR = 120 - 4Q. Setting MR = MC_internal (since the monopoly considers only internal costs), we have 120 - 4Q = 4Q, solving gives Q = 15.

The External Marginal Cost of Producing Coal Is MCexternal =

The External Marginal Cost of Producing Coal Is MC_external =