Question

 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 Brian says that since BYOB is a moriopoly 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 Brian is correct.

 Given the earlier information, Brian _______  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

Ans.
a) A monopolist will maximize its profit where marginal revenue equals marginal cost. Thus, the profit maximizing level of output is 1.25 thousand units at a price of $2.75 per unit as represented by point A. At this output level, average total cost is $3 per unit. Thus, profit = (Price - ATC)*Quantity = (2.75-3)*1.25 thousand = -$312.5 per unit
Hence, the monopolist is incurring a loss of $0.3125 per unit as represented by the shaded triangle.

b) At a price of $3 per unit, the quantity demanded is 1000 units and ATC at this output is $3.50 per unit. So, the profit = (3-3.50)*1000 = -$500

Thus, at price of $3, the firm will incur a loss of $500.

P. Q. TR(P*Q). TC.(ATC*Q) Profit

2.75 1250 3437.5 3750 -312.5

3. 1000. 3000. 3500. -500

Thus, Brian is not correct in his claims

c) At the profit maximizing level, the output is decided where marginal revenue equals marginal cost. Thus, output is 1500 units and corresponding price is given by the demand curve which is $2.5 per unit as represented by point A. At this level of output, ATC = $2.

Thus, profit = (P - ATC)*Q = (2.5-2)*1500 = $750

Thus, firms make a profit of $750.

* Please don’t forget to hit the thumbs up button, if you find the answer helpful.

Thank You