In a monopoly market, how does the profit-maximizing quantity compare to revenue-maximizing quantity? How does the...

In a monopoly market, how does the profit-maximizing quantity compare to revenue-maximizing quantity? How does the profit-maximizing price compare to revenue-maximizing price? Why?

Solutions

Expert Solution

Refer to the diagram below, related to monopoly doing profit-maximization:

Refer to the diagram below, related to monopoly doing revenue-maximization:

Thus, as observed, the profit-maximizing quantity corresponds to the condition where marginal revenue = marginal cost

In contrast, the revenue-maximizing quantity corresponds to the condition where marginal revenue = 0

Thus, the profit-maximizing quantity Q1 is less than the revenue-maximizing quantity Q2

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The profit-maximizing price P1 is higher than the revenue-maximizing price P2

This is because MR = 0 at a quantity higher than the quantity at which MR = MC. Since the price follows from the downward sloping market demand curve in either profit-maximization or revenue-maximization state, the profit-maximizing price P1 is higher than the revenue-maximizing price P2

Rahul Sunny answered 1 year ago

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