ECO100Y5 Lecture Notes - Lecture 10: Marginal Cost, Marginal Revenue, Demand Curve

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Monopolist: a firm that is the only seller in a market. Unlike a perfectly competitive firm, a monopolist faces a negatively sloped demand curve. Total revenue (tr) = p x q. Average revenue (ar) = tr / q = (p x q) / q = p. Since the demand curve shows the price of the product, the demand curve is also the monopolist"s average revenue curve. Since the monopolist"s marginal revenue is less than the price at which it sells its output, the monopolist"s mr curve is below its demand curve. Mr < p because the price must be reduced on all units in order to sell an additional unit. The firm should not produce at all, unless price (ar) > avc. If the firm does produce, it should produce a level of output such that marginal revenue. For a profit-maximizing monopolist, price is greater than marginal cost.

Related Questions

Suppose a monopolist faces a demand curve for its output of P = 300âQ. This means that the marginal revenue curve of the monopolist is M R = 300 â 2Q. Assume that the marginal cost of production is constant and equal to $40.

a) Write down an expression for the monopolists profit, as a function of the quantity of output it produces.

b) If the monopolist must charge the same price for all units of output that it sells (that is, if the monopolist is a single price monopolist), what level of output will maximise the monopolists profit? What price will the monopolist charge? What is its level of profit?

c) If this were a competitive market instead of a monopoly, what level of output would be produced and what price would be charged? What is the level of profit for firms if it were perfectly competitive?

d) Draw a diagram of demand, marginal revenue, and marginal cost that illustrates your answer to part b). From this work out consumer surplus and producer surplus.

e) Draw the same diagram but for your answer to c), the case of the competitive market. From this work out consumer surplus and producer surplus. How much deadweight loss is there from the monopoly? Why?

sangriapug675

1. Which of the following is true under a monopoly?

A. Monopolist chooses the highest possible price.
B. Monopolist chooses a price that is always higher than marginal cost of production.
C. Marginal revenue of a monopolist is price.
D. None of the above are true for monopoly.

2. You are the manager of a monopoly that faces a demand curve described by P = 230 -20Q. Your costs are C = 5 +30Q. The profit-maximizing output for your firm is:

A. 4
B. 5
C. 6
D. 7

3. Which of the following is true?

A. A monopolist produces on the inelastic portion of its demand.
B. A monopolist always earns an economic profit.
C. The more inelastic the demand, the closer marginal revenue is to price.
D. In the short run a monopoly will shutdown if P < AVC.

4. In a competitive industry with identical firms, long rum equilibrium is characterized by:

A. P = AC
B. P = MC
C. MR = MC
D. All of the above

5. You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q². Your firm's maximum profits are:

A. 125
B. 250
C. 100
D. 85

6. A perfectly competitive firm faces:

A. A perfectly elastic demand function
B. A perfectly inelastic demand function
C. a demand function with unitary elasticity
D. none of the above

purpleworm770

1. For a single-price monopoly, marginal revenue is

a. equal to the price for the first unit of output.

b. less than the price for all units of output after the first unit.

c. greater than price. horizontal.

d. a and b

2. The demand curve facing a monopolist is:

a) horizontal, the same as that facing a perfectly competitive firm.

b) upward sloping, the same as that facing a perfectly competitive firm.

c) downward sloping, unlike the horizontal demand curve facing a perfectly competitive firm.

d) downward sloping, the same as that facing a perfectly competitive firm.

lavenderchinchilla784

ECO100Y5 Lecture Notes - Lecture 10: Marginal Cost, Marginal Revenue, Demand Curve

ECO100Y5 Full Course Notes

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