Question

A monopoly that has both a constant average cost and marginal cost of $7 faces the Following:

Q	1	2	3	4	5	6	7	8	9
Demand Price	$11	$10	$9	$8	$7	$6	$5	$4	$3
Marginal Revenue

1. Fill in the Marginal Revenue in each unit.
2. How many units will the monopoly produce?  
3. What is its profit?

Answer 1

Ans. a)

Q	P	TR	MR	AC = MC
1	$11	$11	$11	$7
2	10	20	9	7
3	9	27	7	7
4	8	32	5	7
5	7	35	3	7
6	6	36	1	7
7	5	35	-1	7
8	4	32	-3	7
9	3	27	-5	7

Working Note:

1) MR = change in TR/change in Q

b) The profit-maximizing level of output for a monopoly is where MR = MC

At this point, the profit-maximizing output level is 3 units.

c) Profit maximizing output level Q is 3 units and the profit-maximizing price P is $9, and ATC = $7, then

Profit = TR - TC

= P x Q - ATC x Q

= ( P - ATC ) x Q

= ( $9 - $7 ) x 3 units

= $6

Hence, the profit of a monopoly is $6.