Waldman/Jensen – Industrial Organization Theory and Practice, Fourth Edition
Chapter 5
Page 9
Problem 2:
Without trade: MR = 100 – 2Q
The monopolist sets MR = MC to get Q= 40 and P = 60
Based on this: Consumer Surplus = ½ (100-60)(40) = 800 and
Producer Surplus is equal to profit (given the constant AC curve) = (60-20)40 = 1600
The dominant firm sets MRd = MC.
60 – qd = 20; qd = 40;
Substituting back into the residual demand curve yields Pd = 60 – ½(40) = 40;
The fringe takes the price as given and produces qf = P – 20 = 20.
Total industry output (Q) = qd + qf = 40 + 20 = 60.
Chapter 5
Page 10