Question

 4. Profit maximization and loss minimization

 BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville. Suppose that BYOB cannot price discriminate; that is, it sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) for beer in this market.

 Place the black point (plus symbol) on the graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss.

 Suppose that BYOB charges $2.75 per can. Your friend Paolo says that since BYOB is a monopoly with market power, it should charge a higher price of $3.00 per can because this will increase BYOB's profit.

 Complete the following table to determine whether Paolo is correct.

 Given the earlier information, Paolo _______  correct in his assertion that BYOB should charge $3.00 per can.

 Suppose that a technological innovation decreases BYOB's costs so that it now faces the marginal cost (MC) and average total cost (ATC) given on the following graph. Specifically, the technological innovation causes a decrease in average fixed costs, thereby lowering the ATC curve and moving the MC

 curve.

 Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing the loss.

Answer 1

(1) Monopolist maximizes profit (or minimizes loss) by equating MR with MC. In graph when MR intersects MC, quantity is 1250 and price is $2.75. Since ATC lies above Demand curve at this price, there is a loss.

(2) Total revenue (TR) = Price x Quantity (Q), Total cost (TC) = ATC x Q & Profit = TR - TC = Q x (Price - ATC)

(a) When Price = $2.75, Q = 1,250 and ATC = $3

TR = $2.75 x 1,250 = $3,437.5

TC = $3 x 1,250 = $3,750

Profit = $(3,437.5 - 3,750) = - $312.5 (Loss)

(b) When Price = $3, Q = 1,000 and ATC = $3.5

TR = $3 x 1,000 = $3,000

TC = $3.5 x 1,000 = $3,500

Profit = $(3,000 - 3,500) = - $500 (Loss)

(3) Paolo is Not correct about his assertion (Since loss will increase at a price of $3).

(4) After technological innovation, MR = MC and Q = 1,500 for which Price is $2.5 which is higher than ATC of $2, therefore there is a profit.