Question

Only THIS SIDE MONOPOLY Woreksiteet Hint: Under perfect competition price is fixed for a small producer and MR is the same as price. Under monopoly demand is down sloping and price changes at different quantities. Therefore under monopoly MR is no longer the same as price. You need to calculate it. MR equals change in TR divided by change in Q. TR is still the product of price multiplied by quantity and the rules of profit maximization are the same for all market structures Sam's Kabob café is the only Persian restaurant in town. His daily cost and demand are presented below: KABOBS PRICE TR 100 6.00 200 5.60 300 5.20 400 4.80 500 600 4.00 700 3.60 800 3.20 900 2.80 MRTC ATC MC 900 9.00 3.50 1000 5.00 1.00 1050 3.50 0.50 1150 2.88 1.00 1300 2.60 1.50 1500 2.50 2.00 1750 2.50 2.50 2050 2.56 3.00 2400 2.67 3.50 4.40 Complete the table and answer the following questions and for each answer provide supporting calculations and/or explanation: 1. To maximize his profit how many Kabobs should Sam produce and sell? 2. What price should Sam charge to sell the profit maximizing quantity? 3. What is Sam's profit at the profit maximizing level of output? 4. Sam's demand curve at the profit maximizing point is: elastic. inelastic unit elastic. Explain. 5. What level of output is consistent with productive efficiency? (Hint: productive efficiency does not necessarily coincide with maximum profit.)

Answer 1

Refer the attached table

Q P TR MR TC ATC MC 100 6 600 - 900 9 3.5 200 5.6 1120 5.2 1000 5 1 300 5.2 1560 4.4 1050 3.5 0.5 4004.8 1920 3.6 1150/2.88 1 500 4.4 2200 2.8 1300 2.6 1.5 600 4 2400 2 1500 2.5 2 | 700 3.6 2520 1.2 1750 2.5 2.5 800 3.2 2560 0.4 2050 2.56 3 900 2.8 2520 -0 2400/2.67 3.5

1. A monopolist maximizes profit when MR =MC.

From above table we can see the MR =MC = 2 at Q = 500 units.

The firm should maximize profit at MR =MC. Therefore, the firm should produce and sell 500 units.

2. Profit maximizing price = $ 4.4 (Refer the table above.

3. Profit = TR -TC = 2200 - 1300 = $ 900. (refer above table)

4. A monopolist maximizes profit at MR =MC. The monopolists demand or, equilibrium quantity is always a elastic. Calculating the elasticity.

$\large E = \frac{dQ}{dP}\times \frac{P}{Q}$

p 800 4.4 E=_30500

Elasticity of demand = - 2.2(Elastic)

5. Productive efficiency is the condition of perfect competition.

Output = 800 units. At this point P = $ 3.20, and MC = $ 3.

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