BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville

4. Profit maximisation and loss minimisation

BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville. Imagine that BYOB cannot price discriminate; that is, it sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) for beer in this market.

Place the black point (plus symbol) on the graph to indicate the profit-maximising price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss.

Imagine that BYOB charges $2.50 per can. Your friend Van says that since BYOB is a monopoly with market power, it should charge a higher price of $3.00 per can because this will increase BYOB's profit.

Solutions

Expert Solution

The optimum of a monopoly occurs at the point where Marginal revenue of the monopolist is equal to its marginal cost. This can be shown in the diagram as follows;

No, by increasing price the monopolist will not be satisfying his optimum condition of equating marginal revenue with marginal cost.

Rahul Sunny answered 2 years ago

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