a.) When a monopolist chooses the output that maximizes profits, we know that MR - MC,...
a.) When a monopolist chooses the output that maximizes profits, we know that MR - MC, and also that P > MR. This is inefficient because
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The monopolist is the only producer in the market
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The monopolist fails to make transactions where the marginal benefit is greater than the marginal cost
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There are entry barriers
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The monopolistic is not minimizing costs
b.) A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151 units of output for $9.00 per unit. The marginal revenue of the 151 unit of output is
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-$5.10
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-$0.10
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$5.10
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$2.45
Homework Answers
| a) | The FIRST option is correct. | ||||||||
| The monopolist is the only producer in the market | |||||||||
| Explanation: Monopoly market is the market where there is the only producer in the market | |||||||||
| Hence there is no competitor in the market. Monopolist is free to choose | |||||||||
| the market price of the product. Hence MR - MC, and also that P > MR theory is | |||||||||
| inefficient for the monopolist market. | |||||||||
| b) | Marginal revenue per unit | ||||||||
| = Revenue for 151 units - revenue for 150 units /150 units | |||||||||
| = (151*9) - (150*10) / 150 units | |||||||||
| =-$0.10 | |||||||||
| Therefore second option is correct | |||||||||
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