3. Total and average revenue of a monopolist Suppose that Sam Lane is the only s

Question

3. Total and average revenue of a monopolist Suppose that Sam Lane is the only seller and marginal revenue (MR) curves facing Sam. You can use the red rectangle lobeled Total Revenue (cross symbols) to compute scroll over the shaded area with your mouse. You will not be graded on where you place the Aa Aa of trekking poles in a small town. The following graph shows the demand total revenue at various prices along the demand curve. To see the area of the Total Revenue rectangle, rectangle. PRICE (Dollars per pole 100 90 80 70 60 50 40 30 20 10 Total Revenue Demand 0 4 8 12 16 20 24 28 32 36 4 QUANTITY IThousands of trekking polesper month) Hel Clear A

Explanation / Answer

A)

At 32,000 poles/month, we see that the corresponding price on Demand curve is $20 per pole. Hence, average revenue per pole = 32,000 * 20 = $640,000 per pole

B)

In the case of monopolistic competition, firms’ MR will always be less than the market price because it can only increase demand by reducing the prices. Hence, Sam would maximize profits by producing at a quantity where MR =MC. From the graph, it is clear that the optimum quantity at which MC=MR would be less than 20,000. Hence in order to maximize the profit Sam would not produce more than 20,000 poles.

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