Question

You have been hired as a consultant for the following monopoly firms. Treat each firm as an individual. Thus each row represents one fim. You will need to use the MR =MC rules to make the recommendations to the firms. You will be using logic and critical thinking skills to make the suggestions Examine the information on MR, MC, Price, ATC, AVC and AFC to make a recommendation to each firm Remember firms want to max their total profits, they are not altruistic. Secondly, recall the rules of profit maximization, minimizing losses, and shutdown cases for monopoly. Apply those rules to each row to make a recommendation to each firm as to whether or not they are able to maximize profits minimize losses; or should the firm shut dowTi. Remember in the short run, firms should shut dow if P is 1less than AVC. Finally if firms can get short run profits in the SR, monopolies ca usually carry those profits into the long ru Record your answers for cach row and submit them to the dialog box for this assigment by the due date listed in assignnents Monopoly MC Price P/L MR TR TC TVC ATC AVC МС 10 5 10 100 50 +50 30 5 3 2600 2500 50 <50 -100 1600 52 32 50 1000 5(min) 10 5 10000 8000 +2000 5000 5 90 70 2250 1500 +750 750 60 50 50 Should these monopolists increase or decrease output, increase or decrease the price, and on what information is your answer based? Can the monopolists maximize profits, minimize a loss, or should they shutdown? Give reasons for your answers based on the numbers in the rows 50 25

Answer 1

(1) Firm 1

(a) Since MR < MC (5 < 7), firm is incurring marginal loss (= MC - MR), to minimize which, firm should decrease output.

(b) Since demand curve slopes downward, lower output signifies an increase in price.

(c) Since Price is higher than both ATC and AVC (10 > 5 > 3), firm is making profit and should not shutdown.

(2) Firm 2

(a) Since MR < MC (<50 < 50), firm is incurring marginal loss (= MC - MR), to minimize which, firm should decrease output.

(b) Since demand curve slopes downward, lower output signifies an increase in price.

(c) Since Price is higher than AVC (50 > 32) but less than ATC (50 < 52), firm is making loss, but since price is higher than AVC, it should not shutdown.

(3) Firm 3

(a) Since MR = MC (= 5), firm is maximizing profit and should not change output.

(b) Since output will be unchanged, price should be unchanged too.

(c) Since Price is higher than both ATC and AVC (10 > 8 > 5), firm is making profit and should not shutdown.

(4) Firm 4

(a) Since MR > MC (70 > 50), firm is incurring marginal profit (= MR - MC), to maximize which, firm should increase output.

(b) Since demand curve slopes downward, higher output signifies a decrease in price.

(c) Since Price is higher than both ATC and AVC (90 > 60 > 50), firm is making profit and should not shutdown.