Question

Answer the following questions and show all working.

1.    Using the information below for a monopoly firm, calculate TR, TC, ATC and Profits: (8)

Quantity	Price	Total Revenue	Total Cost	ATC	MR	MC	Profits
0	17				0	0
1	16				16	4
2	15				14	6
3	14				12	8
4	13				10	10
5	12				8	12

(a) What is the monopolist’s profit maximizing level of output and price? (2)

      

(b) At what output and price would allocative efficiency be achieved? Why? (3)

Answer 1

QUANTITY	PRICE	TOTAL REVENUE	TOTAL COST	ATC	MR	MC	PROFIT
0	17	0	0	-	0	0	0
1	16	16	0+4 = 4	4	16	4	12
2	15	30	4+6 = 10	5	14	6	20
3	14	42	10+8 = 18	6	12	8	24
4	13	52	18+10 = 28	7	10	10	24
5	12	60	28+12 = 40	8	8	12	20

Total Revenue = Price x Quantity

Total Cost is found out by the summation of marginal cost.

Average Total cost = Total cost/Quantity produced

Profits = Total Revenue - Total cost

a) A monopolist will maximize its profit at that level of output where marginal revenue is equal to marginal cost and marginal cost is increasing or MC curve is rising after that level of output.

In this case, marginal revenue = marginal cost = 10 at output 4 and price 13.

So, the profit maximizing level of output is 4 and price is 13 and maximum profit is 24.

b) A monopolist charges highest price and produces less quantity. In case of allocative efficiency, quantity produced is maximum as price charged is lower.

For allocative efficiency, the producer will produce at the point where price is equal to marginal cost. This happens at output 5 where price = marginal cost = 12. So, the output is 5 and price is 12. A monopoly leads to wastage of resources and a monopolist distorts allocation of resources because a monopolist charges price greater than marginal cost.