31. Refer to Table 17-3. Suppose that Maria and Miguel work together in order to

Question

31.

Refer to Table 17-3.  Suppose that Maria and Miguel work together in order to operate as a profit-maximizing monopolist. What price will they charge for milk?

Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for milk is shown in the table below:
Quantity

(in gallons) Price Total Revenue

(and Total Profit) 0 $24 $0 1 $22 $22 2 $20 $40 3 $18 $54 4 $16 $64 5 $14 $70 6 $12 $72 7 $10 $70 8 $8 $64 9 $6 $54 10 $4 $40 11 $2 $22 12 $0 $0

Explanation / Answer

In this problem there are only two residents. They are Maria and Miguel. They can produce as much milk as they desire without any cost. Milk can be sold in the town as per demand schedule of the town. As the cost is zero, they will go on producing milk so long last unit can add something to total sale. Due to zero marginal cost, whatever they can get from sale, adds to their profit. So by acting together as mnopolist, they will produce where TR is optimum. Here highest TR is $72. It can be acheved when 6 units are sold at price $12. Note that at 6th unit marginal revenue (Extra sale proceeds) is $72-$70=$2 After this figure it has been negative (-2 at 7th unit). So Answer is $12 of option B.

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