Question

Below are two different cases. In each case, the monopolist wants to maximize its profits or minimize its losses. Analyze each case and give a recommendation as to what the monopolist should do based on the possible recommendations provided below. Explain how you reached this recommendation and the reasons for it.

Possible Recommendations:

a. Increase production and reduce the price.

b. Decrease production and raise the price.

c. Shut down.

d. The monopoly is currently at the correct position.

CASE ONE:

Price=3

Quantity of Output=1500

Total Cost=4500

Average Cost= (must find)

Marginal Revenue=2

Total Revenue= (must find)

Fixed Costs= (must find)

Marginal Cost=3

Answer 1

Monopoly faces a downward sloping demand curve. It maximizes profit where MR = MC

Correct option:

b. Decrease production and raise the price.

(In this case: MR < MC and MR would increase only when quantity produced reduces and price increases)