In: Economics
. A single-price monopolist has the schedules given in the table below.
Quantity (units) |
Price (MYR) |
Marginal revenue (MYR) |
Marginal cost (MYR) |
1 |
22 |
20 |
6 |
2 |
20 |
16 |
8 |
3 |
18 |
12 |
12 |
4 |
16 |
8 |
18 |
5 |
14 |
4 |
28 |
a. Determine the profit-maximizing level of output, price as well as the amount of profit or loss at this level. Clarify how you obtain the answer.
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b. Compare between the perfect competition and monopoly market structure.
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The given table can be expanded to include Total Revenue and Total Cost.
Quantity (units) |
Price (MYR) |
Marginal revenue (MYR) |
Total Revenue |
Marginal cost (MYR) |
Total Cost |
1 |
22 |
20 |
20 |
6 |
6 |
2 |
20 |
16 |
36 |
8 |
14 |
3 |
18 |
12 |
48 |
12 |
26 |
4 |
16 |
8 |
56 |
18 |
44 |
5 |
14 |
4 |
60 |
28 |
72 |
TR is found by the summation of MR at each level of output; TC is found by the summation of MC at each level of output
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a) Profit maximizing level of output is where MR = MC
From the table, this is where Q = 3 units and P = MYR 18
At this level, Profits = TR - TC
Profit = 48 - 26 = MYR 22
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b) The main points of difference are:
Perfect Competition | Monopoly | |
Number of buyers and sellers | Large number of buyers and sellers | Many buyers, and a single seller |
Price determination | Price decided by market, everyone is a price taker | Seller is the price maker |
Entry and exit | Free entry and free exit | High entry barriers, costly to exit |
Economic Profits | Not possible | Possible till the firm has market power |
P and MC | P = MC | P > MC |
Efficiency | Outcome is efficient | Outcome is inefficient |
MR | Horizontal | Downward sloping |
Perfect competition is an efficient market, because it leads to the society's maximum welfare. This doesn't happen in monopoly. The monopoly firm can charge any price, and thus offer a lower quantity for sale. The monopoly firm is able to make economic profits, and it also attempts to raise the entry barriers.