Question

?uestion. Suppose you are a consultant for a monopoly firm that asks for an assessment of its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down, or stay put) and price changes (raise, cut, or stay put) in each of the following situations (a through e): a. [10 points] MR S298 b. [10 points] MR- $148 c. [10 points] P-$269 d. [10 points] MR S150 . [10 points] MR-$288 Note: P- price; MR marginal revenue; AVC MC $348 MC $98 MC $319 MC $100 MC $338 AVC- $288 AVC- $138 AVC-$289 AVC $140 AVC-$278 average variable cost; MC-marginal cost]

Answer 1

Answer:-

a) MR = $298 MC = $348 AVC = $288

Here, marginal revenue is less than marginal cost. So it is producing too much. It can increase profit only by decreasing output.

b) MR = $148 MC = $98 AVC = $138

In this example, marginal revenue is greater than marginal cost. Which means the firm is producing too little. It can increase profit by increasing output.

c) P = $269 MC = $319 AVC = $289

Here P is less than AVC. It means the firm is losing money. Either it should continue selling for the time being to minimize losses, or opt for a shut down. If the price is above the AVC it can continue or else close down.

D). P = $150 MC = $100 AVC = $140

Here also, marginal revenue is greater than marginal cost. Which means the firm is producing too little. It can increase profit by increasing output.

E). P = $288 MC = $238 AVC = $278

Here, marginal revenue is less than marginal cost. So it is producing too much. It can increase profit only by decreasing output.