Question

if a monopoly firm is current produce 100 units of outputs where price equals $7,average total cost equals $8 and marginal cost is increasing. Use one diagram to answer the following parts.

a)Draw a graph showing a monopolist in this short-run equilibrium.No explanation is required/ Label the critical values on the diagram if the data are provided.

b)Calculate the amount of profit or loss. Indicate the area of it in your diagram.

c)How can increase in demand help the monopolist to change the current situation of profitability from bad time to good time? Explain with the aid of your diagram. Label the areas of the profit and loss clearly.

Answer 1

Answer -1.

a) Refer Image -1

b) Amount Of Loss(L) =  area of 1234

L = 100.(8-7) = 100 dollars

The total loss is of $100 in the short run.

C)

An increase in demand will cause a rightward shift in the demand curve from D1 to D2. As a result , the Marginsl Revenue curve will also shift from MR1 to MR2. Assuming that the cost structure of the firm remains same, the MR2 and MC curve will intersect at point E2 which gives us new equilibrium . At this equilibrium point, new equilibrium quantity is given by Q2 and equilibrium price is given by P2 .

The profit is the dotted region in the diagram.