Suppose you attend an important panel on business management andhear two speakers discuss:Speaker A:...

Suppose you attend an important panel on business management and hear two speakers discuss:

Speaker A: "To maximize profits, a monopolist must obviously produce where the gap between price and average cost is greatest."

Speaker B: "No, to maximize total profits, the company must produce where the gap between price and marginal cost is greater, as this will maximize monopoly power and, therefore, profits."

Despite how sophisticated these arguments may seem, what have these entrepreneurs not understood? Correct these erroneous reasoning.

Solutions

Expert Solution

Speaker A correction:
The price is not the marginal revenue that the monopolist receives. The MR is less than the PR.
And the Average Cost is not the additional cost of producing a product. The MC is greater than the AC after dimnishing returns set it.
So to maximise profit, it is important to find the point where MC = MR. At this point, the difference between total cost and total revenue will be greatest.

Speaker B correction
The price is not the marginal revenue that the monopolist receives. The MR is less than the PR. So to maximise profit, it is important to find the point where MC = MR.
To maximise monopoly power, profits must be maxmised

Rahul Sunny answered 2 years ago

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