Question

Refer to the accompanying table, which represents the costs and production for a monopolist.

Price      Quantity              Fixed Cost           Variable Cost

$15         0                                $5                                   $0

$13         1                                 $5                                $4

$11         2                                  $5                                  $9

$9         3                                  $5                                  $14

$7         4                                    $5                                $20

$5         5                                   $5                                  $29

The profit-maximizing quantity for this firm is:

A. five. B. zero. C. one. D. three.   E. four.

Suppose that the owner of a smartphone monopoly hires you to determine whether his firm has made the profit-maximizing number of smartphones. He provides you with the following production and sales information for the first six months of 2016.

Month             Sales                          MR of last unit                                                   MC of last unit

January 2016      10,000                        $250                                                                      $225

February 2016    10,500                       $230                                                                       $230

March 2016         11,000                        $220                                                                       $210

April 2016            10,500                        $210                                                                        $220

May 2016             12,000                       $200                                                                         $210

June 2016            11,000                         $220                                                                       $220

In which months should the firm have produced fewer smartphones?

In which months should the firm have produced more smartphones?

In which months was the firm maximizing profits?

Answer 1

(Question 1) Option (D)

Profit is maximized when MR = MC, where

MR = Change in Total revenue (TR) / Change in quantity (Q), while TR = Price (P) x Q

MC = Change in Total cost (TC) / Change in quantity (Q), while TC = Fixed cost (FC) + Variable cost (VC)

P ($)	Q	TR ($)	MR ($)	FC ($)	VC ($)	TC ($)	MC ($)
15	0	0		5	0	5
13	1	13	13	5	4	9	4
11	2	22	9	5	9	14	5
9	3	27	5	5	14	19	5
7	4	28	1	5	20	25	6
5	5	25	-3	5	29	34	9

Therefore, MR = MC = $5 when Q = 3 units.

(Question 2)

The firm will maximize profit when MR = MC. The firm should produce higher quantity when MR > MC and produce less when MR < MC. Therefore,

Firm should have produced fewer smartphones - April 2016, May 2016

Firm should have produced more smartphones - January 2016, March 2016

Firm is maximizing profits - February 2016, June 2016