Firm P is a monopolist for a new drug that makes people feel thinner. The total cost function is C(Q) = 200 + 10Q + Q² The inverse demand function is p(Q) = 82 - Q (d) If the company increases its price by a small fraction (let us say 1%), by what proportion does demand go down? [Round to two decimal places.] (e) What percentage of the price is due to costs and what is due to markup? [Round to two decimal places.] (f) What is the deadweight loss of the monopoly pricing compared to competitive prices? (g) Firm P argues that other firms should not be allowed to enter the market, since it is a natural monopoly. A potential competitor, whose cost function is identical to firm P's, argues that it is not a natural monopoly. Show why both are right at the same time. [Hint: Recall from the lecture slides, status of natural monopoly may change with output quantity. If the competitor enters the market, two identical firms will jointly produce competitive equilibrium quantity. Find the critical level of output that equates a single firm's cost of producing total market output to the total cost of each producing half outputs by two firms, and discuss according to the output levels you discovered in previous parts.]
