6. Notice the relationship between marginal revenue and total revenue. What is t

Question

6. Notice the relationship between marginal revenue and total revenue. What is the value of marginal revenue when total revenue is maximized? Do not be fooled on any exam or on question 10 below—revenue maximization is different from profit maximization. Always use the MR=MC rule to determine profit maximization, but always use the rule you just developed to determine revenue maximization.

7. The graph above shows the demand (=AR=P) curve faced by a monopolist. What is the profit-maximizing output? What price will be charged at that output?

8. What is the cost per unit at that output? How much profit per unit will be made at that output? How much total profit will the monopolist make at that output?

9. Since this is a monopolist and, presumably, entry by rivals is blocked, the firm can make these economic profits in the long run. If this were, instead, a purely competitive firm, where would the price settle? Compare the output that would be produced by a pure competitor with the output of the monopolist. Would more or less be produced with competition? Would the price be higher or lower with competition?

10. What would be the revenue-maximizing output of this monopolist?

11. At equilibrium, is the price charged by the monopolist higher or lower than the MC? Is the price charged higher or lower than the minimum ATC? What do these facts tell you about the productive and allocative efficiency of monopoly versus pure competition?

Explanation / Answer

Answer 6:

Whenever Total Revenue is maximized, the Marginal Revenue will be zero and MR will become negative when Total Revenue starts decreasing.

Answer 7:

Te profit maximsing output of the monopolist occurs at the point where MR = MC and the price at this level of output on the demand curve corresponding to this level of output is the profit maximizing price level.

Answer 8:

The total profits at this level = ( Price - Average Total Cost ) * Quantity

Profit per unit = Total profits / Quantity = Price - ATC.

Answer 9:

Under Pure Competition, price charged by monopolist will be equal to the Marginal Cost. The output produced by the monopolist will be less than the pure competition level and the price charged by the monopolist will be more than the pure competition level as price is higher than than the Marginal cost in monopoly.

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