1. Suppose that a monopolist is producing at an output where its average total c
ID: 1121556 • Letter: 1
Question
1. Suppose that a monopolist is producing at an output where its average total cost of production is minimized and equals $50. If marginal revenue equals $60, is the monopoly producing at the prot-maximizing output level? Why or why not?
2. A famous recording artist is paid as a percentage of the total dollar sales of a recent popular (and very protable) CD. In a recent MTV show discussing the CD, the artist, in an apparent act of generosity toward his fans, complains that he thinks the company selling the CD is charging a price that is much too high. Explain why you might be suspicious of his “generosity”.
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Explanation / Answer
1.A monopolist produces maximum profit when marginal revenue and marginal cost of production are equal.Price is not set at minimum of average cost.Therefore,the monopolist is not producing at the maximum level.
2.I might be suspicious of his generosity because the music industry is a form of monopolistic competition.There is product differentiation but products are similar.So,a firm charge a very high price because it will loose its customers.
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