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.

2.3.   How much profit does the monopolist earn? A.   $200,000 B.   $300,000 C.   $150,000 D.   $100,000
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.

Explanation / Answer

Monopolist profit:

profit = total revenue - total costs

We know a monopolist will profit maximize where MR=MC.

That point is (400, 1000). (where red meets dark blue)

But we also know that for a monopolist, the MR curve is half the Demand curve.

Since consumers are willing to pay the amount at the demand curve, they are willing to

pay 2000 per unit. (blue line)

Total Revenue:

Hence total revenue = Q*P = 400*2000 = $800,000.

Total Cost:

We know ATC at a given point and that Total Cost (TC) = ATC*Q because

the average is just the total/quantity.

ATC at the point is $1500, and quantity is 400: ATC*Q = 1500*400= $600,000.

Profit = TR - TC = 800,000 - 600,000 = $200,000

A

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