The Wisconsin Waters Company has a monopoly on sel...

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This solution was written by a subject matter expert. It's designed to help students like you
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The monopoly firms in the market increase the producer surplus earned in the market by
increasing profits. The entry of other firms is prohibited hence the monopoly firms never earn
zero profits in the market.

Explanation:

The profit maximization of the firms will increase the producer welfare and reduces the
consumer welfare in the market.

Step 2/6

a)

Totalrevenue=price×quantityMR=ΔTRΔQ

price gallons of water total revenue marginal revenue

10 0 10*0=0 -

9 10 9*10=90 (90-0)/(10-0)=9

8 20 8*20=160 (160-90)/(20-10)=7

7 30 7*30=210 (210-160)/(30-20)=5

6 40 6*40=240 (240-210)/(40-30)=3

5 50 5*50=250 (250-240)/(50-40)=1

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 4 60 4*60=240 (240-250)/(60-50)=-1

3 70 3*70=210 (210-240)/(70-60)=-3

2 80 2*80=160 (160-210)/(80-70)=-5

1 90 1*90=90 (90-160)/(90-80)=-7

0 100 0*100=0 (0-90)/(100-90)=-9

The total revenue is derived from the price set in the market for the specific quantity sold.

The marginal revenue is the ratio of the change in the total revenue to the change in the
quantity sold in the market.

Explanation:

The marginal revenue is the additional revenue with the increase in the quantity of production.

Step 3/6

b)

MC=$4TC=∫MCdQTC=4QATC=TCQATC=4

price

6.5 profit maximization output

4 MC=ATC

MR demand
35 quantity x

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The marginal revenue and demand is decreasing constantly with the increase in the quantity
hence the downwards sloping curve is obtained. The marginal and average cost curve is
constant as derived hence the constant horizontal line.

Explanation:

The marginal revenue turns negative after reaching the maximum quantity.

Step 4/6
c)

The profit will be maximized when the MR=MCfor the firm.

The quantity of water will be 35and the price of the water will be 6.5for the profit maximization.

profit=revenue−cos⁡trevenue=price×quantity=6.5×35=227.5cos⁡t=4×35=140profit=227.5−140=87.5

The profit earned at the profit maximization is 87.5.

The profit is maximized and the producer surplus also increases when the profit are
maximized.

Explanation:

The profit maximization point decreases the welfare of the consumers in the market.

Step 5/6

d)

The price in the competitive market is set at P=MC.

The price in the competitive market will be $4and the output will be 60.

The competitive firms will set the lower price in order to increase the market access compared
to the other firms in the market as the entry and exit of the firms will be free which is not the
case of monopoly.

Explanation:

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The competitive firms will act as the price taker in the market.

Step 6/6

e)

price

6.5 profit maximization output

A

DWL
4 B C MC=ATC

MR demand
35 quantity x

The triangular area is ABC is the dead weight loss in the market.

The dead weight loss is created because the price is set at the profit maximization price which
reduces the consumer surplus and increase the producer surplus.

Explanation:

The dead weight loss creates inefficiency in the market and market failure occurs.

Final answer
Given the price and quantity of the water produced by the monopoly firm.

In a) total revenue decreases when the marginal revenue turns negative.

In b) demand and marginal revenue curve is downwards sloping and marginal cost is
horizontal.

In c) price is 6.5and output is 65.

In d) price will 4and output will be 60.

In e) dead weight loss is the triangular area.

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