Monopoly Price-Output Decision
Calvins’s Barber Shops, Inc., has a monopoly on barbershop
services provided in the south side of Chicago because of restrictive licensing
requirements, and not because of superior operating efficiency. As as monopoly,
Calvin’s provides all industry output.. For simplicity, assume that Calvins’s
operates a chain of barbershops and the each shop has an average
cost-minimizing activity level of 750 haircuts per week, with Marginal Cost=
Average Total Cost= $20 per haircut.
Assume that demand and marginal revenue curves for haircuts
in the south side of chicago market are:
P=$80-$0.0008Q
MR=$80-$0.0016Q
where P is price per unit, MR is marginal revenue, and Q is
total firm output (haircuts).
A. Calculate the monopoly profit-maximizing price-output
combination, and the competitive market long-run equilibrium activity level.
B. Calculate monopoly profits, and discusses the
“monopoly problem” from a social perspective in this instance.
