Question

Price/Cost ($) 7) Monopoly II (6 points) The marginal costs (MC), average variable costs (AVC), and average total costs (ATC) for a monopoly are shown in the figure below. The figure also shows the demand curve (D) and the marginal revenue curve (MR) for this market. 501 ATC AVC a. What is the firm's profit-maximizing level of output? Label this on the graph. b. What price will the monopolist charge for that level of output? Label this on the graph. C. What is the monopolist's profit-per unit? d. What is the monopolist's total profit? Shade in this area on the graph. e. Shade in the area on the graph which represents the deadweight loss (DWL) in this market f. What will happen to this firm and industry in the long-run? MR 10 20 30 40 Quantity

Answer 1

IMG ATC AVG Price / cost ($) I IMR Scanned with CamScanner Quantity

a) The profit maximization condition is MR = MC.Thus, the profit maximization level of output is 16.

b) The monopolist will charge $28 for this level of output.

c) The monopolist's profit per unit = Price per unit - ATC = $28 - $18 = $10.

d) The monopolist's total profit = Profit per unit * Quantity = $10 * 16 = $160. Total profit is equal to the area ABCD in the graph.

e) DWLis equal to the area BEF in the graph.

f) Since it is the only firm in the industry, in the long run, it may earn positive profit or normal profit by lowering the price of it's product.