Economics Assignment: Monopoly Market Analysis

This economics assignment analyzes the monopoly market for MedEcon, determining optimal price and output, consumer and producer surplus, and deadweight loss. The article also discusses the efficiency loss and natural monopoly market.

Running Head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 3....................................................................................................................................2
Answer a.................................................................................................................................2
Answer b................................................................................................................................5
Answer c.................................................................................................................................8
Reference list............................................................................................................................10

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Answer 3
Answer a
The market demand for lifetime sales of the product is given as P = 12000 – 2Q
Total Revenue (TR) of the MedEcon is obtained as = ( P∗Q )
¿ ( 12000−2Q )∗Q
¿ 12000 Q−2 Q2
Marginal Revenue therefore is,
d (TR)
dQ =d (12000 Q−2Q2 )
dQ
¿ 12000−4 Q
The fixed cost of the business is $2,000,000
In the given scenario, there are two different marginal cost over two range of output. For first
1500 implants the marginal cost is $1000 and from 1501st implants marginal cost rise to
$2000.
Therefore,
The Total cost function for MedEcon is
TC=$ 2,000,000+$ 1000 Q1 + $ 2000Q2
Q1 denotes implants less than equal to 1500
Q2 denotes implant greater than 1500
Optimal price and output in the monopoly market is determined where marginal revenue
equals marginal cost (Fine, 2016).

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In output is within 1500 implants then the optimal output is determined as
MR = MC
12000 – 4Q = 1000
Or, 4Q = 11000
Or, Q = 2750
However, as per quantity restriction (implants ≤ 1500), output should be less than 1500. The
solution does not follow the restriction. Therefore, this possible output is discarded.
For units greater than 1500, the optimal output will be
MR = MC
12000 – 4Q = 2000
Or, 4Q = 10000
Or, Q = 2500
Optimal quantity for the monopolist (QM) = 2500
Optimal monopoly price
PM =12000−2 Q
¿ 12000− ( 2∗2 50 0 )
¿ 12000−500 0
¿ 7 000

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Figure 1: Price and output in the monopoly market
(Source: As created by Author)
Monopoly profit
Profit=TR−TC
Now,
TR=P∗Q
¿ 2 50 0∗70 00
¿ 17,500 , 000
TC =$ 2,000,000+ ( 1500∗$ 1000 ) +(1000∗$ 2000)

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¿ $ 2,000,000+1,500,000+$ 2,0 00,000
¿ $ 5,5 00,000
Profit=17,500 , 000−$ 5,5 00,000
¿ $ 12 , 000 , 000
Answer b
Consumer surplus measures the gain of the consumer from participating in market
activity. It is obtained as the area of the triangle below the demand curve and above the
equilibrium price (Baumol & Blinder, 2015).
The demand in the market is given as, P = 12000 – 2Q
From the demand, function the reserve price for the consumer is,
P = 12000 (Price associated with zero output level)
Monopoly equilibrium price (PM) = 7000
Consumer Surplus= 1
2∗( 12000−70 00 )∗250 0
¿ 1
2∗500 0∗2 5 0 0
¿ 6,250,000
Producer surplus is the gain to producers. It is the area below the equilibrium price
and above the supply curve. There are two areas of producer surplus.
Producer Surplus= {( 7000−1 000 )∗1 500 } +{( 7 000−2000 ) ∗10 00}
¿ ( 6 000∗1500 )+(5 000∗10 00)
¿ 9 , 0 00,000+5 , 0 00,000

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¿ 14 , 000,000
Figure 2: Consumer and producer surplus under monopoly
(Source: as created by Author)
Under competitive market, the first order condition for profit maximization requires
price equals marginal cost (Arrow, 2015). Therefore, price and quantity in the competitive
market is obtained as
P=MC
If implants are less than 1500, then optimal output is
12000 – 2Q = 1000
Or, 2Q = 11000
Or, 2Q = 5500

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This again does not follow the quantity restriction of implants less than 1500.
Therefore, this output is not considered.
For implants greater than 1500, optimal output is obtained as
12000 – 2Q = 2000
Or, 2Q = 10000
Or, Q = 5000
Optimal output in competitive market (PC) = 2000
Optimal output in Competitive market (QC) = 5000
Consumer Surplus= 1
2∗( 12000−2 000 )∗4500
¿ 1
2∗10 000∗5000
¿ 2 5 ,00 0 , 000
In competitive market, producers will enjoy a surplus only for number of implants up to
1500. No surplus will be received thereafter.
Producer Surplus= ( 2000−1000 )∗1500
¿ 1000∗1500
¿ 1 ,500,000

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Figure 3: Consumer and Producer Surplus under perfect competition
(Source: as created by the Author)
As computed above in the competitive market demand buyers receive a higher surplus
as compared to the monopoly market. This means buyers are in an advantageous position in
the competitive market. In the presence of numerous seller in the competitive market, the
sellers do not have any market power. The price in the market is determined by the demand
supply condition. Sellers in the competitive market receive a lower surplus than that under
monopoly. The monopolist on the other being the single seller in the market can influence
price and hence manages to receive a higher surplus and profit.
Answer c
In the monopoly market, a lower output is sold at a high price as compared to
competitive market. This indicates inefficiency in resource allocation leading to a welfare
loss or deadweight loss.

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Deadweig h t loss= 1
2∗( Qc−QM )∗(PM−PC )
¿ 1
2∗( 500 0−2 50 0 )∗(70 00−2000)
¿ 1
2∗250 0∗500 0
¿ 6 , 25 0 , 000
Figure 4: Comparison of monopoly and competitive market
(Source: as created by Author)
As show above in a pure monopoly market, there is a deadweight loss indicating net
loss in social welfare. The dead weight loss arises because the monopolist offers a lower
quantity at a high price. This reduces consumer surplus. However, all the lost consumer
surplus does not add to the producer loss leading to efficiency loss. Under this circumstance,
it might be recommended for government to eliminate monopolized market. However, there

10ECONOMICS ASSIGNMENT
is situation where only a single seller can serve the market in the most efficient way. Here,
the government should encourage monopoly market. In this form of market, usually a high
fixed cost is present. The single monopolist enjoys benefit of economies of scale and serve
the market efficiently. This type of market is called natural monopoly (Mahanty, 2014).
Public utilities such as electricity, water supply are examples of natural monopoly market.

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Reference list
Arrow, K. (2015). Microeconomics and operations research: Their interactions and
differences. Information Systems Frontiers, 17(1), 3-9.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Fine, B. (2016). Microeconomics. University of Chicago Press Economics Books.
Mahanty, A. K. (2014). Intermediate microeconomics with applications. Academic Press.