Question

Question. Suppose you are a consultant for a monopoly firm that asks for an assessment of its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down, or stay put) and price changes (raise, cut, or stay put) in each of the following situations (a through e):

a. [10 points] MR = $298 MC = $348 AVC = $288

b. [10 points] MR = $148 MC = $98 AVC = $138

c. [10 points] P = $269 MC = $319 AVC = $289

d. [10 points] MR = $150 MC = $100 AVC = $140

e. [10 points] MR = $288 MC = $338 AVC = $278

[Note: P = price; MR = marginal revenue; AVC = average variable cost; MC = marginal cost]

Answer 1

ans....
a) MR = $298 MC = $348 AVC = $288
Here, marginal revenue is less than marginal cost. So it is producing too much. It can increase profit only by decreasing output.
b) MR = $148 MC = $98 AVC = $138
In this example, marginal revenue is greater than marginal cost. Which means the firm is producing too little. It can increase profit by increasing output.
c) P = $269 MC = $319 AVC = $289
Here P is less than AVC. It means the firm is losing money. Either it should continue selling for the time being to minimize losses, or opt for a shut down. If the price is above the AVC it can continue or else close down.