Consider a dealership in a small city that enjoys a monopoly in the sale of Rolls-Royces

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Consider a dealership in a small city that enjoys a monopoly in the sale of Rolls-Royces. The market demand that the dealership faces is given by the following equation:

P = 140000 − 10000 QD
Also, the Marginal Cost (MC) of selling Rolls-Royces is fixed at $60,000 and equal to the

Average Cost (AC).

1. (a) Using the information given above, illustrate the Demand curve, the Marginal Rev- enue curve, and the Marginal Cost curve facing the dealership on a single graph. Carefully explain how the dealership will determine the price of Rolls-Royces? How many Rolls-Royces will the dealership sell at this price? Calculate the profits made by the Rolls-Royce dealership. Show all calculations, and use an appropriate graph to illustrate your answer. (10 points)

2. (b) Calculate the Consumer Surplus (CS1) and the Producer Surplus (PS1) for the monopoly solution as determined in part (a). Show all calculations, and illustrate your answer using the graph in part (a). (5 points)

3. (c) What combination of price and quantity will characterize the equilibrium if this mar- ket were highly competitive? Show all calculations, and illustrate your answer in the graph from part (a). (10 points)

4. (d) Discuss the differences between the monopoly outcome from part (a) and the compet- itive outcome from part (c). Clearly show all calculations and illustrate your answer using a well-labeled graph. (5 points)

5. (e) Suppose a tax of $20,000/Rolls-Royce is levied on the dealership. What would happen to the monopolist’s choice of price and quantity? What are the Consumer Surplus (CS2), the Producer Surplus (PS2), and the dead-weight loss when the tax is imposed on the dealership? Clearly show all calculations, and illustrate using an appropriate graph. (10 points)