Question

Suppose, at a given point in time, Chez Rachael is a non-price discriminating monopolist selling ratatouille and is producing its profit-maximizing level of output. Suppose further that at this level of production, Rachael's average fixed cost of producing ratatouille is $2, her average total cost is $10, and her marginal cost is $12.

At her current level of production, what is…

a) Rachael’s average variable cost of producing ratatouille?

b) Rachael’s marginal revenue from selling ratatouille?

c) the price of ratatouille?

d) Rachael’s profit from selling ratatouille?

Will Rachael continue to produce ratatouille in the long run? Why or why not? Explain verbally.

Answer 1

a) Average variable cost = average total cost - average fixed cost

= 12 - 2

= $10

b) At profit maximization, MR = MC, so the marginal revenue is $12.

c) The price will be $12 as Rachael is non-price discriminating monopolist so the average revenue will be constant and at equilibrium MR=AR=P so the price is $12.

d) The profit is 2Q. As profit = TR -TC

TR= PxQ

TR = 12Q

TC= ATCxQ

TC = 10Q

Profit = TR - TC

= 12Q - 10Q = 2Q

Rachael will continue to produce as the profit is positive and able to cover the fixed cost as well as the variable cost.