Answer to Question #91081 in Microeconomics for Gill

Question

4. A monopolist faces a linear demand for its product and has a flat marginal and average cost of production. An innovation lowers the cost of production by $1 per unit. Use the graph to show the profit-maximizing monopolist’s choice and the changes due to the innovations.
a. How much will the price change as the result of the innovation?
b. How much will profit per unit change as the result of the innovation?
c. Summarize: who benefits from the innovation? Explain in 2-3 sentences.

Answer 1

a. The supply will increase, so the price will decrease as the result of the innovation.

b. The profit per unit may either increase or decrease as the result of the innovation.

c. Both consumers and monopolist benefit from the innovation.