In: Economics
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?
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.