This graph illustrates the demand for computers in a small country. To develop a

Question

This graph illustrates the demand for computers in a small country. To develop a domestic computer industry, the government prohibits imports of computers and gives a single local firm the right to produce and sell computers. The demand curve shows the local demand for computers. The cost curves show the marginal cost (MC) and average total cost (ATC) of the single producer. The graph also shows the marginal revenue curve faced by this firm.                     

                          This graph illustrates the demand for computers in a small country. To develop a domestic computer industry, the government prohibits imports of computers and gives a single local firm the right to produce and sell computers. The demand curve shows the local demand for computers. The cost curves show the marginal cost (MC) and average total cost (ATC) of the single producer. The graph also shows the marginal revenue curve faced by this firm. How many computers will the monopolist sell to maximize profits? At what price will the monopolist sell each computer? How much profit does the monopolist earn?

Explanation / Answer

4.1MR=MC at 400 computers, so the monopolist will sell 400 computers.

4.2 The monopolist will sell each computer at $2,000 because that is where the demand curve quantity is 400 (ie the price at which the monopolist can sell all 400 computers).

4.3 Just multiply 400 computers by 2000 dollars each, which is $800,000, then calculate the cost by finding ATC at 400 computers, which is 1500, multiplied by 400, is 600,000. Subtract and get $200,000-- the profit of the monopolist.

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