Question

2) On graph paper, set up a starting graph for a monopolist using demand, marginal revenue, marginal cost, and average total cost curves.

a. In the graph you drew, show what happens to the monopolisy's market graph if fixed costs increase, using a colored pencil. Show any curve shifts and the effects of those curves on output and product price.

b. In the same graph, using a second colored pencil identify the monopolist's profits after the change in fixed costs

Answer 1

A monopolist maximizes profit at the point where marginal cost curve intersects marginal revenue curve. Below this point equilibrium output is determined on X axis (Q) and price on Y axis (P) from demand curve and average cost from AC curve(C1). Profit = price minus average cost = Pink + Green box

Increase in fixed cost shifts average cost parallel upwards. P and Q remain same but profit decreases due to increases in average cost (C2). Profit = P - C2 = Pink box