2. How does a pure monopolist maximize profits? Explain clearly, with reference to a graph showing...

2. How does a pure monopolist maximize profits? Explain clearly, with reference to a graph showing the firm's output and pricing decisions

Expert Solution

Answer:

A profit maximising monopolist will set his price and output at the point where the Marginal Revenue equals Marginal Cost. This is the profit maximising price and output.

From the above figure we can analyse the price and output deceision of a monopolist. The AR curve is the demand curve of the monopolist and the slope of the Marginal Revenue curve is twice the slope of the demand curve. Inorder to sell more the monopolist must lower the price. So the marginal revenue from additional unit decreases (less than price) that is why the the MR curve lies below the Demand Curve (AR curve).

In the figure the monopolist will set the output at point E where the MR curve equals MC. The equlibrium quantity is OM. The equilibrium price is OP. The average cost (cost per unit) is OT. It is lower than the price. The profit of the monopolist is shown by the shaded area PP'LT. It is the profit per unit of the output.

Rahul Sunny answered 7 months ago

explain the process a monopolist goes through to maximize profits.

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