1 . You are in charge decision making for a firm that is a pure monopoly. You kn
ID: 1095976 • Letter: 1
Question
1. You are in charge decision making for a firm that is a pure monopoly. You know that P > ATC, and that MC > MR on the amount of output you are presently producing.
a) The board of directors of the firm wants to know if it is profitable. What do you tell them? How do you know?
b) The board also wants to know if the enterprise is maximizing its' profit at present. What do you tell them about the profit maximizing issue? On what do you base your answer, and if the firm is not maximizing profit at the current production level, what direction do you tell them you want to change output to achieve the profit maximizing objective? Explain your answer fully.
Explanation / Answer
a.Natural monopoly firm would be maximizing the profit where the MR =MC but here firm is producing where the MC > MR. it implies that firm is producing more than the output that is produced in the monopoly competition. Profit is gap between the price and Average cost. HereP is more than the ATC hence still firm is making profit. Firm is getting abnormal profit here.
b.Here firm is earning the profit but not maximizing the profit. Firm can earn more profit by reducing or confining the output where the MR =MC. Profit would be more here.
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