Question

Question 1. Suppose you are a consultant for a monopolist that asks for its policies in the short run. (raise, cut, shut down, or stay put) and price changes (raise, cut, or stay put) in each of the following situations: [4 points] an assessment of What would you recommend in terms of quantity changes MR $152 P $157 MC $157 AVC $158 a. - b. [4 points] P S210 MC $210 AVC $212 [4 points] P S156 MC $156 ATC S106 C. d. [4 points] MR $120 MC S100 AVC $100 - MR $150 [4 points] MC $150 ATC $130 e. marginal cost; AVC = Notations/Abbreviations: P price; MR average variable cost; ATC average total cost] marginal revenue; MC _

Answer 1

1. The monopolist must cut down production because the MR < MC i.e. the revenue from last unit produced is less than the cost of producing. The fall in quantity will result in higher price level.
2. The monopolist must shut down because the price is less than the AVC. This implies that the monopolist is not able to cover the variable cost.
3. The monopolist must stay put as he is able to gain profit because the price is greater than the ATC.
4. The monopolist must increase quantity because the MR > MC. The increase in quantity will result in fall in price.
5. The monopolist must stay put because the monopolist is producing at equilibrium i.e. MR =MC.