Question

1) This monopolist earns $________profit per unit (numeric and sign) when it maximizes its profit.

2) What time period of production is this monopolist operating in?
       a) Short run
       b) market period
       c) long run
       d) short or long run

3) Which of the following best describes what the monopolist should do in this situation?
       a) Raise its price.
       b) Lower its price.
       c) It should shut down.
       d) Shut down if P < AVC, and continue to produce if P> AVC ; but we don't know what AVC is we cannot tell
        e) It should exit the industry.
       f) Shut down if P < ATC, and continue to produce if P> ATC ;

4) in what section of the demand curve is this monopolist producing?
       a)The elastic section.
       b)The inelastic section.
       c)The unitary section.

P ATC 20 MC 17 15 13 9 6 D 0 40 50 55 90 Q MR

Answer 1

P ATC 20 MC 17 15 13 9 6 D 0 40 50 55 90 Q MR

a. The profit of the given monopolist is maximized when it produces a quantity at which MR = MC i.e., the quantity at which the MC and MR curves intersect.

From the given figure, it can be observed that the MC and MR curves interest at a quantity = 40 units

When Q = 40 units, the price charged by the monopolist as obtained from the demand curve = $15

When Q = 40 units, ATC = $17

Profit = Total Revenue - Total Cost = Price * Quantity - ATC * Quantity = $15 * 40 - $17 * 40 = -$80(loss)

Ans: -$80

b. As the monopolist is experiencing loss, the period given must be short-run. If the period was long-run, the monopolist would have exit from the market.

Ans: a) Short run

c. In the short-run, the monopolist should continue to produce if it recovers its variable costs from the revenue generated i.e., if TR > VC or alternately if P > AVC.

If P<AVC, the monopolist would experience operating loss and hence should shut down the firm.

However, the action taken by the monopolist can't be judged without the AVC curve details.

Ans: d) Shut down if P < AVC, and continue to produce if P> AVC ; but we don't know what AVC is we cannot tell

d. It is to be noted that at the midpoint of the demand curve, the elasticity of demand = 1.

At a point higher than the midpoint of the demand curve, the elasticity of demand is greater than 1(elastic portion) and at a point lower than the midpoint of the demand curve, the elasticity of demand is less than 1(inelastic portion).

It is known that MR = 0 at the midpoint of the demand curve.

From the graph, it can be observed that MR = 0 at a quantity greater than 40 units (the point at which MR curve intersects x-axis). Therefore, the profit-maximizing quantity of production is above the midpoint of the demand curve and hence, in the elastic portion of the demand curve.

Ans:  a)The elastic section