A monopolist faces the following demand curve: Quantity Price 0 $30 1 $27 2 $24 3...
A monopolist faces the following demand curve:
|
Quantity |
Price |
|
0 |
$30 |
|
1 |
$27 |
|
2 |
$24 |
|
3 |
$21 |
|
4 |
$18 |
|
5 |
$15 |
|
6 |
$12 |
|
7 |
$9 |
|
8 |
$6 |
|
9 |
$3 |
|
10 |
$0 |
Refer to Table 15-20. If a monopolist faces a constant marginal cost of $20, how much output should the firm produce in order to maximize profit?
| a. |
2 units |
|
| b. |
3 units |
|
| c. |
4 units |
|
| d. |
5 units Thanks. |
Homework Answers
Option (a).
Total Revenue (TR) = Price (P) x Quantity (Q)
Marginal revenue (MR) = Change in TR / Change in Q
MR is computed as follows.
| P | Q | TR | MR |
| 30 | 0 | 0 | |
| 27 | 1 | 27 | 27 |
| 24 | 2 | 48 | 21 |
| 21 | 3 | 63 | 15 |
| 18 | 4 | 72 | 9 |
| 15 | 5 | 75 | 3 |
| 12 | 6 | 72 | -3 |
| 9 | 7 | 63 | -9 |
| 6 | 8 | 48 | -15 |
| 3 | 9 | 27 | -21 |
| 0 | 10 | 0 | -27 |
Monopolist maximizes profits by equating MR with MC. When MC = $20, closest value of MR is $21 which is for output level of 2 units.
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