Question

 Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints.

 Complete the first row of the following table.

 Suppose that the government forces the monopolist to set the price equal to marginal cost.

 Complete the second row of the previous table.

 Suppose that the government forces the monopolist to set the price equal to average total cost.

 Complete the third row of the previous table.

 True or False: Under the average-cost pricing policy, the cable company has no incentive to cut costs.

•  True

•  False

Answer 1

Profit maximization in monopoly situation

Monopolist is a price Maker. He will determine the quantity of output that will maximize revenue. The monopolist faces a downward sloping demand curve because he can sell more if he lowers the price. The profit maximizing price and output is where marginal revenue equals marginal cost, then it is extended to the market demand curve to determine what market price corresponds to that quantity.

The monopoly profit equals (P-ATC) x Q.

P=$50

ATC=$34

Q= where MR=MC=6,000

Profit =($50-$34) x 6000=$96,000.

Socially optimal outcome

The socially optimal quantity is at the intersection of MC and demand curve.

Q= MC=D= 12

Price at MC=D=$20

ATC is above $20, so there is a loss.

Fair return outcome

The fair return outcome is at the intersection of ATC and demand curve

Q= ATC=Demand curve= 10,400

Price at ATC=D=$28

ATC=$28

Profit=($28-$28)x 10,400=$0

Since P=ATC, the monopolist makes zero economic profit.

	Short run
Pricing mechanism	Quantity	Price	Profit	Long run decision
	Subcriptions	Dollars per subscription
Profit Maximization	6000	50	Positive ( Price is above ATC)	Continue in business
Marginal Cost Pricing	12000	20	Negative ( Price is below ATC).	Exit the industry
Average Cost Pricing	10400	28	Zero	Continue or exit
Under the average cost pricing policy, the cable company has no incentive to cut costs.
True.