A monopoly faces the following inverse demand: P = 20-2.5Q. Its cost function is given as: TC = 18+ 3.5Q+.25Q². a. Find the firm's profit-maximizing price and output, and its profit. Sketch the equilibrium price and quantity. b. Calculate the firm's Lerner index at the profit-maximizing price and output. What does the number tell you? c. Suppose the government imposes a specific sales tax of $5.50 per unit on the monopolist's product. Consequently, the firm's total cost function would become: TC = 18+9Q+.25Q². Solve for the new equilibrium price-quantity combination. What has happened?

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Monopoly Market

When a company and its products dominate a sector or an industry, it is termed a monopoly. When a firm and its products control a market, then it is called a monopoly.