Answer

a. From the output print out:

The estimated demand function is Q
D
= 1200 500.6565P. With this
function, we can know that the autonomous demand is 1200 units and with a one
unit increases or decreases in the price, the quantity demanded in this market will
fall or rise by 500.6565 units respectively.
The estimated supply function is Q
S
= 200 + 500.3232P. With this
function, we can know that the firm faces with the cost of production is $0.3997
per unit and with an increase or decrease in the price by one unit, quantity
supplied in this market will also rise or fall by 500.3232 units.
b. Determine the market equilibrium price (P*) and market equilibrium quantity (Q*).
The market equilibrium condition requires that Q
D
= Q
S

1200 500.6565P 200 500.3232P
*
1200 200 500.3232P 500.6565P
1400 1000.9797P
1400
P $1.3986
1000.9797




And
*
Q 200 500.3232( 1.3986 ) 499.7669 units
c. Compute the price elasticity of demand at this equilibrium point and explain its
concept.
*
d *
dQ P 1.3986
E x 500.6565x 1.4
dP Q 499.7669

From the above result (E
d
= 1.4), it is explained that the demand in this market at the
equilibrium level is Elastic and with an increase or decreased in the price by 1% will
cause quantity demanded in this market to fall or rise by 1.4%.
d. Compute the price elasticity of supply at this equilibrium point and explain its concept.
*
S *
dQ P 1.3986
E x 500.3232x 1.4
dP Q 499.7669

From the above result (E
S
= 1.4), it is explained that the Supply in this market at the
equilibrium level is Elastic and with a variation in the price by 1% will cause quantity
supplied also to vary by 1.4%.
e. Compute Consumer Surplus (CS) and Producer Surplus (PS) at the equilibrium point.
We have:
* * * *
max min
( P P ) Q ( P P ) Q
CS and PS
2 2


Where
max min
1200 200
P 2.3969 and P 0.3997
500.6565 500.3232
therefore:
*
( 2.3969 1.3986 )( 499.7669 )
CS $249.4586
2

*
( 1.3986 0.3997 )( 499.7669 )
PS $249.6086
2

f. If the firm Total Cost is TC 5 0.15Q, then its Marginal Cost is MC 0.15
g. Determine the profit maximizing price and quantity for competitive firms.
The Profit maximization principle for competitive firms is price (P) = MC.
Since MC 0.15 and Q 1200 500.6565P, thus for these competitive firms:
c c
P $0.15 and Q 1200 500.6565( 0.15 ) 1124.9015 units
h. Compute Consumer Surplus (CS) in the case of competitive strategy.
c c
c c
max
( P P ) Q ( 2.3969 0.15 ) (1124.9015)
CS CS $1263.7706
2 2


i. Competitive price elasticity of demand is
c
d c
dQ P 0.15
E 500.6565x 0.0668 or 0.07
dP Q 1124.9015

From the above result, it is explained that the demand in the competitive market is
Inelastic and with an increase or decrease in the price by 1%, quantity demanded in this
market will fall or rise respectively by only 0.07%.
j. Determine the amount of profit earned in the competitive market.
We have profit function is
c c c
TR TC P xQ ( 5 0.15Q )
Since
c c
P 0.15, Q 1124.9015 ; thus ( 0.15x1124.9015 ) ( 5 ( 0.15x1124.9015 )) $5 t = = = + =

k. Determine the profit maximization price and quantity strategy for the monopoly firm.
A monopolys profit maximization principle requires that: MR MC = .
We have
1200 Q Q
Q 1200 500.6565P P 2.3969
500.6565 500.6565

= = = thus
2
Q Q
TR PxQ ( 2.3969 )xQ 2.3969Q
500.6565 500.6565
= = = , then
dTR 2Q
MR 2.3969
dQ 500.6565
= = and with MC 0.15 = we will have:
m
2Q ( 2.3969 0.15 )( 500.6565 )
MR MC 2.3969 0.15 Q
500.6565 2
562.4625 units

= = =
=

Since
m
m m
Q 562.4625
P 2.3969 P 2.3969 $1.2735
500.6565 500.6565
= = =
l. Determine the Consumer Surplus (CS) for monopoly case.
m m
m m
max
( P P )( Q ) ( 2.3969 1.2735 )( 562.4625 )
CS CS $315.9352
2 2

= = =
m. Calculate price elasticity of demand in the monopoly condition. Explain.
m
d d m
dQ P 1.2735
E 500.6565x 1.1336 or E 1.13
dP Q 562.4625
= = = =
From the above result, it is explained that the demand in the monopoly market is Elastic
and with an increase or decrease in the price by 1%, quantity demanded in this market
will fall or rise respectively by only 1.13%.
n. Determine the monopoly profit generated in this market.
m m m m m
TR TC P xQ ( 5 0.15Q ) 1.2735( 562.4625 ) [ 5 0.15( 562.4625 )]
716.2960 89.3694 $626.9266
t = = + = +
= =

o. Compute the amount of Deadweight Loss (DWLs) that can be generated in the
Monopoly Market.
- By Comparing to the Equilibrium level, we have:
m *
P 1.2735 P 1.3986, thus there will be no Deadweight Loss that could be
generated in this circumstance.
= < =

- By comparing to the Competitive Market, we have:
m c
P 1.2735 P 0.15, thus the Deadweight Loss that could be generated in this
circumstance will be determined as:
= > =

m c c m
( P P )x(Q Q ) ( 1.2735 0.15 ) x( 1124.9015 562.4625 )
DWL $315.9501
2 2

= = =

p. The Maximum revenue that could be earned in this market.
In part k, we have
2
Q 2Q
TR 2.3969Q and MR 2.3969
500.6565 500.6565
= = and
for the TR to be maximum if its MR = 0.
2Q 2Q 2.3969( 500.6565 )
MR 0 2.3969 0 2.3969 Q
500.6565 500.6565 2
Q 600.0118
600.0118 units and the price is P 2.3969 2.3969 $1.1984
500.6565 500.6565
= = = =
= = = =
and the maximum revenue could be earned is
max
TR $1.1984x600.0118 $719.0541 = =
q. Comment about this monopoly.
In general, this monopoly is efficient and serious. Though this monopoly operates with
its price below the market equilibrium price
m *
( P $1.2735 P 1.3986 ) = < = and earns
less revenue than the maximum level that the market can earns
m
max
(TR $716.2960 TR $719.0541) = < = , It can earn $626.9266 in profit (see part
n). It is efficient because with its Elastic demand in this market
d
( E 1.13 ) = (see part
m) this monopoly can raise its revenue from
* * * m
TR P x Q $1.3986x499.7669 $698.9740 to TR $716.2960 = = = =
It is serious because it raises Consumer Surplus from
* m
CS $249.4586 to CS $315.9352 = =
which benefits generally to the consumers.
end