Question

In: Economics

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)
$101$10
$92$18$8
$83$24$6
$74$28$4
$65$30$2
$56$30$0
$47$28$-2
$38$24$-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.


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