Question

 3. Profit maximization and loss minimization

 BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville. Suppose that BYOB cannot price-discriminate: that is, it sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) for beer in this market.

 Place the black point (plus symbol) on the graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss.

 Suppose that BYOB charges $2.75 per can. Your friend Edison says that since BYOB is a monopoly with market power, it should charge a higher price of $3.00 per can because this will increase BYOB's profit.

 Complete the following table to determine whether Edison is correct.

 Given the earlier information. Edison _______  correct in his assertion that BYOB should charge $3.00 per can.

 Suppose that a technological innovation decreases BYOB's costs so that it now faces the marginal cost (MC) and average total cost (ATC) given on the following graph. Specifically, the technological innovation causes a decrease in average fixed costs, thereby lowering the ATC curve and moving the MC curve.

 Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing the loss.

Answer 1

Profit maximization condition under Monopoly is where MR=MC.

We can see that MR= MC at Q= 1.25 thousand cans of beer. So, profit maximization price is $2.75.

Suppose that BYOB charges $2.75 per can.Your friend Antonio says that since BYOB is monopoly with market power, it should charge a higher price of $3 per can because this will increase BYOB's profit.

Price (Dollars per can)	Quantity demanded (Cans)	Total revenue (Dollars)= P(Q)	Total cost (Dollars)= ATC(Q)	Profit (Dollars)= TR-TC
2.75	(1.25)(1000)= 1250	(2.75)(1250)=3437.5	(3)(1250)= 3750	(3437.5-3750)= -$312.5
3	(1)(1000)= 1000	(3)(1000)= 3000	(3.50)(1000)= 3500	(3000-3500)= -$500

Given the earlier information, Edison is not correct in his assertion that BYOB should charge $3 per can because he incurs more loss if he charge $3 per can.

After technological innovation ,MC and ATC curve changed. Now , the profit maximization level is shown below :

Answer 2

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