Question

Define and explain the relationship between total revenue, average revenue, and marginal revenue for a monopolist. What is monopoly profit? Should a monopolist produce quantities of product greater than that which would maximize profits?

Answer 1

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Total revenue is the total money received by selling the total quantity of output.

Marginal revenue is the additional revenue received by selling an additional unit of output.

Average revenue is calculated by dividing total revenue by total quantity.

TR curve is inverse U shape while MR and AR is negatively sloped.

When MR is zero, the TR is at its maximum.

When MR is positive, the TR is increasing but when MR is zero, TR is maximum. When MR becomes negative, the TR starts decreasing. AR remains positive.

MR lies below the AR( demand) curve.

The monopolist profit-maximising condition is

MR=MC

Corresponding to this condition, the quantity is determined and on the demand curve price will be determined.

There is economic profit because price is greater than MC at the profit-maximising quantity.

Profit is shown by the shaded rectangle.

Profit=(P-MC)Q

No, a monopolist should not produce quantities of product greater than that which would maximize profits because then profit will not be maximised.