ECO201e Group-based Assignment: Monopoly of Alpha Analysis and Welfare

This assignment analyzes the monopoly of Alpha, focusing on profit maximization and welfare implications within the framework of managerial economics. The solution begins by determining the optimal output and price for Alpha using the demand equation and the profit-maximizing condition (MR=MC), resulting in an optimal output of 90 units and a price of $550. Total revenue and total cost are then calculated, revealing that Alpha earns a profit of $18,000. The analysis further explores the welfare effects of Alpha's pricing strategy, comparing the outcomes of charging a monopoly price versus a welfare-enhancing price. The assignment concludes that while Alpha earns supernormal profits in both the short and long run, the monopoly creates deadweight loss and negatively impacts society's welfare. References to relevant economic literature are included to support the analysis.

Running head: Monopoly of Alpha
Monopoly of Alpha
Name of the Student
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1Monopoly of Alpha
Answer to Question 4:
Part b:
The demand equation of the firm is D= $1000-5Q
The profit maximising condition for a monopoly firm is MR=MC (Karl et al., 2019).
Therefore, the profit maximising level of output for Alpha is at the point where the firm’s
MR curve and MC curve intersects each other. Thus, the optimal output of Alpha is 90 units.
Now, to find the optimal price, let us substitute the quantity in the demand equation.
Where, D=P= $1000-5Q
Therefore, P =1000- (5*90)
P=1000-450
P=550.
Thus, the optimal level of the price charged by Alpha equals $550.
Thus, from the derived optimal price and output total revenue (TR) of the firm can be
obtained. We know that, TR = P*Q
Therefore, TR= 550*90
TR=$49,500
On the other hand, the total cost (TC) of the firm can be derived from the diagram. The total
cost of the firm can be derived by multiplying the output level with the price touching ATC
curve (Zha, Yin & Yang, 2016). The output point is where MR equalises MC ($350) and the
price level is the point where the intersecting point of MR and MC touches the ATC
(Average Total Cost) of the firm (90 units). Therefore, TC = $350*90
= $31,500

2Monopoly of Alpha
Thus, to obtain the level of profit or loss of the firm π=TR−TC
π=49500−31500
π=18000
Therefore, the monopoly firm Alpha is earning a profit of $18000 from charging a
monopoly price of $550 and producing an output of 90 units.
Part d:
When the firm Alpha is charging a price of $550 and producing output level equal to
90 units, it is earning a profit of $18000. However, when the firm is charging a welfare-
enhancing price of $100 and producing 180 units of output. This can be the point of a
competitive market structure (Chen & Schwartz, 2013). Thus, it is incurring a loss in the
short run. Thus, society’s welfare is enhanced when Alpha is charging a lower price against
the supply of higher output level. Because the consumers or society can gain from a higher
supply of output against a lower level of price. Whereas, in the long run, the firm can rectify
its loss by implementing advanced technologies and various cost-cutting measures. This can
help to maintain social welfare and normal profit level of the monopoly firm. Therefore, in
the long run, the firm can make both society and revenue better off.
On the other hand, Alpha is creating a deadweight loss for society by charging a higher level
of price and supplying a low output. In the short run, a monopoly firm earns a supernormal
profit. However, in the long run, it can continue to earn a supernormal profit because of its
market dominance. Moreover, a profit-maximising firm tends to make society suffer and
deteriorates its welfare condition (Antoshchenkova & Bykadorov, 2017). Thus, both in the
short run and long run the monopoly firm Alpha can earn supernormal profit but will leave
the society in a worse off situation.

3Monopoly of Alpha
References
Karl, E., CASE, F., OSTER, R., & SHARON, E. (2019). PRINCIPLES OF
MICROECONOMICS. PEARSON.
Chen, Y., & Schwartz, M. (2013). Product innovation incentives: Monopoly vs.
competition. Journal of Economics & Management Strategy, 22(3), 513-528.
Zha, L., Yin, Y., & Yang, H. (2016). Economic analysis of ride-sourcing
markets. Transportation Research Part C: Emerging Technologies, 71, 249-266.
Antoshchenkova, I. V., & Bykadorov, I. A. (2017). Monopolistic competition model: The
impact of technological innovation on equilibrium and social optimality. Automation and
Remote Control, 78(3), 537-556.