Economics_SL9 by ClassOf1

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									            Economics

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Sub: Economics                                                                         Topic: Micro Economics

Question:

Analyzing Profit Maximization Level of a Monopolist.
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.




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 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Economics                                                                         Topic: Micro Economics

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.




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 **




                           www.classof1.com/homework-help/economics
 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Economics                                                                          Topic: Micro Economics

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