Sub: Economics Topic: Micro Economics

Question:

Given the pure monopolist average cost, average variable cost, marginal cost &
marginal revenue, recommend what the monopolist should do to maximize the
profits. Graph the monopolist demand curves, cost curves, price & quantites.

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A pure monopolist determines that at the current level of output the marginal cost of
production is $2.00, average variable costs are $2.75, and average total costs are $2.95. The
marginal revenue is $2.75.

What would you recommend that the monopolist should do to maximize profits? Draw a graph
showing the above situation. Include in that graph, the monopolist's cost curves, demand and
marginal revenue curves and the price and quantities that are indicated by the situation
described above.

Solution:

Monopolist can maximize their profits by producing at the point where MR = MC. At the current
level of output, MR is greater than MC. i.e $2.75 > $2.00. Given the above information, the
monopolist current situation is depicted as follows.

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 Sub: Economics Topic: Micro Economics

In the above graph, the monopolist is producing OQ level of output & charging OP level of price.
At this current level of output, MR is greater than MC. But profit maximization is achieved
where MR = MC. In order to achieve this profit maximization, the monopolist should produce
more. i.e They should increase their current level of output & reduce their current price level.
By doing so, the monopolist can maximize their profits.

So, the monopolist should produce OQ* level of output where MR = MC. They should reduce
their price to OP*. Thus, the monopolist can maximize their profits by producing at the level of
output where MR = MC.

** End of the Solution **

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