2. Monopolist Profit (5 points) Price, marginal revenue, marginal cost, acerage

Question

2. Monopolist Profit (5 points) Price, marginal revenue, marginal cost, acerage total cos MC ATC Pa Demand Q H Quantity per period a. The profit maximizing quantity is determined by the intersection of and wcurves and this happens at Point b. The profit-maximizing price is and will generate total economic profit equal to the area of 3. (10 points) Consider a natural monopolist (unregulated) that would like to produce where MR-MC. It faces a downward-..sloping demand curve of P: 100 … 2Q and marginal revenue curve of 100-4Q. Its marginal cost is $20 no matter how many units it makes, it is constant. a. Solve for the profitmaximizing quantity for this natural monopolist by setting MR-MC and solving for Q, Q = b. Suppose fixed costs are $100. What is the total cost for this monopolist? TC c. What is the total revenue for this monopolist? d. What is the average total cost for the monopolist? What is the difference between this number and the price? ATC Difference e. What are the monopolist's profits? Profits

Explanation / Answer

2. a) The profit maximising quantity is determined by the intersection of Marginal cost and Marginal revenue curves and this happens at point G.

(In monopoly for maximum profit marginal cost will always be equal to marginal revenue.)

b) The profit maximising price is P3 and will generate total economic profit equal to the area of P3EGP1.

(The optimal quantity produced at point G is Q, so the optimal price will be the highest price there on the demand curve i.e P3 and the profit per unit is P3P1. So total profit is P3EGP1.

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