Consider the following demand curve facing a monopolist in the home building industry.
Price Quantity TR MR MC ATC
$340,000 0
320,000 1,000 $160,000 $340,000
300,000 2,000 140,000 240,000
280,000 3,000 120,000 200,000
260,000 4,000 140,000 185,000
240,000 5,000 160,000 180,000
220,000 6,000 180,000 180,000
200,000 7,000 200,000 182,857
180,000 8,000 220,000 187,500
160,000 9,000 240,000 193,333
140,000 10,000 260,000 200,000
You calculated that the quantity the monopolist will produce is 5,000. The price that will be charged is $240,000. And the economic profits that will be earned are $300,000,000.
Now assume that the government puts a price ceiling on makers of houses. The price cannot be higher than $200,000. Recalculate the decision of the monopolist under these conditions. Hint: every time there is a number above $200,000 under Price, change the number to $200,000. Every number below $200,000, do not change. Recalculate the total revenue and the marginal revenue. In calculating the marginal revenue, remember to divide by the change in quantity (1,000). The quantity produced will occur where the new marginal revenue equals the marginal cost.
The new quantity produced is ______________?
The new price charged is $_________________?
The new economic profits earned are equal to $__________________?
What can you conclude about price ceilings if there is monopoly?
