Question

True-False-Ambiguous and Explain Why 5. Biggie Inc. is a single-price monopoly. If the cost of its raw materials rises by $2 for each unit produced, then it will increase it price by $2 per unit. Draw a graph.

Answer 1

Per-unit $2 increase in material cost will increase marginal cost (MC) by $2 per unit. Since monopolist equates MR and MC, at new profit-maximizing level MR increases by $2.

However, MR curve lies below demand curve. So $2 increase in MR will increase price by less than $2.

In following graph, initial equilibrium is at point A where MR intersects MC0 with price P0 and output Q0. After cost increases, MC0 shifts up to MC1 and new equilibrium is at point B where MR intersects MC1 with higher price P1 and lower output Q1. Here, (MC1 - MC0) > (P1 - P0).

P. MR. MC Pi Po MC B MCO < MR D & So