Question

PART V: Study Problem 1. Suppose a monopolist faces the demand and cost curves shown in the figure below SMC 7 ATC AVC 2 MR D Q 100 200 300 400 500 600 700 800 Quantity 12-a. The monopolist maximizes profit (minimizes loss) by producing units of output. 12-b. The monopolist will sell its output at a price of S per unit. 12-c. The monopolist earns a profit' (loss) of S 12-d. What happens if monopolist charges a price of $2? Revenues and costs (dollars)

Answer 1

Answer
a)
the firm produces at MR=MC
where
Q=300 units

b)
the firm charge a price of $5 from the demand curve at the output level

c)
Economic profit=(P-ATC)*Q
ATC=3 from ATC curve
Economic profit =(5-3)*300=$600

d)
if P=$2 then the firm produces 600 units where ATC>P so the firm makes economic losses at the price level.