Question

1. The following shows the price and quantity schedule for a monopolist

Price                    9 8 7 6 5 4 3 2 1 0

Quantity              0 1 2 3 4 5 6 7 8 9

Marginal cost equals 5. Calculate the marginal revenue associated with each quantity level;  

What level of output should the monopolist choose? Explain

Answer 1

Marginal revenue is the additional revenue that firm earns from one additional unit of output. Thus Marginal Revenue is given by

In order to maximize profit a monopolist chooses that quantity at which MR = MC and if there is no such quantity at which MR = MC and if there is no quantity at which MR = MC, then it produces till MR > MC where MR = Marginal Revenue and MC = Marginal Cost.

We can see from above that there is no quantity at which MR = MC and last quantity at which MR > MC(=5) is Quantity = 2.

Hence, Monopolist should choose 2 units of output.