Now, draw (and label) a demand and MR curve, but add a marginal cost (MC) curve to the picture:

PRICE	QUANTITY	TOTAL REVENUE (TR)	MARGINAL REVENUE (MR)
$10	1	$10
$9	2	$18	$8
$8	3	$24	$6
$7	4	$28	$4
$6	5	$30	$2
$5	6	$30	$0
$4	7	$28	$-2
$3	8	$24	$-4
$2 $1	9 10	$18 $10	$-6 $-8

1. Now, draw (and label) a demand and MR curve, but add a marginal cost (MC) curve to the picture:

SHOW the profit-maximizing output for the monopolist, Q* (remember -- even though the market structure is different, all profit-maximizers follow the same rule . . . ).

At Q* (the profit-maximizing output), show the PRICE that the monopoly firm will be able to charge its customers for that level of output.

How does the monopolist's price compare to his/her MC?

Solutions

Expert Solution

1. Let the MC is $4.

The profit-maximizing condition for the monopolist is : MR = MC. So, from the graph it is seen that the profit-maximizing output for the monopolist, Q* = 4 and the price the monopoly firm will be able to charge its customers for that level of output is $7 per unit.

The price that the monopolist charges to its customers is the price at which buyers are willing to buy the profit-maximizing quantity. Thus, price is greater than MC for a monopolist.

Rahul Sunny answered 1 year ago

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