Question

Below are two different cases. In each case, the monopolist wants to maximize its profits or...

Below are two different cases. In each case, the monopolist wants to maximize its profits or minimize its losses. Analyze each case and give a recommendation as to what the monopolist should do based on the possible recommendations provided below. Explain how you reached this recommendation and the reasons for it.

Possible Recommendations:

a. Increase production and reduce the price.

b. Decrease production and raise the price.

c. Shut down.

d. The monopoly is currently at the correct position.

CASE ONE:

Price=3

Quantity of Output=1500

Total Cost=4500

Average Cost= (must find)

Marginal Revenue=2

Total Revenue= (must find)

Fixed Costs= (must find)

Marginal Cost=3

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Answer #1

Monopoly faces a downward sloping demand curve. It maximizes profit where MR = MC

Correct option:

b. Decrease production and raise the price.

(In this case: MR < MC and MR would increase only when quantity produced reduces and price increases)

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