Question

following are the demand and total cost schedules unit) is a 4. A monc Group A curve,W nitely e maximi groups 2. Th e for Company Town Water, a local monopoly: Price per Gallon $0.28 0.26 0.22 0.20 0.16 0.12 Output in Gallons Total Cost $6,000 15,000 22,000 32,000 46,000 64,000 50,000 100,000 150,000 200,000 250,000 300,000 Why?

Answer 1

Answer

A profit-maximizing monopolist will produce the quantity of output at which its marginal cost(MC) is equal to the marginal revenue(MR), and then selects the price following the market demand curve. To find the profit maximizing quantity of this monopolist, we have to first calculate the total revenue(TR), MR,and MC.To calculate them, three more columns, named total revenue,marginal revenue, and marginal cost have been added to the main table.

Output in Gallons(Q)	Price per Gallon(P)	Total Cost(C)	Total Revenue (TR)=Q*P	Marginal Revenue(MR)=d(TR)/dQ	Marginal Cost(MC)=d(TC)/dQ
50,000	$0.28	$6,000	$14,000	-	-
100,000	0.26	15,000	26,000	0.24	0.18
150,000	0.22	22,000	33,000	0.14	0.14
200,000	0.20	32,000	40,000	0.14	0.2
250,000	0.16	46,000	40,000	0	0.28
300,000	0.12	64,000	36,000	-0.08	0.36

From the above table, we see that MR, and MC both are same ($0.14) for 150,000 gallons of output.So the monopolist will produce this amount of output. From the table, we see, that for 150,000 gallons of output, the monopolist charges $0.22. So the profit-maximizing price is $0.22.

Profit = Total Revenue - Total Cost

If TR>TC, then profit is positive , and if TR<TC, then profit is negative or loss.

Here, at 150,000 gallons of output, the monopolist's TR is $33,000, and TC is $22,000.

AS TR>TC, so this monopolist earns profit.and the amount of the profit is,

Profit= $33,000 - $22,000

or, Profit= $11,000

Therefore, the profit-maximizing monopolist, Company Town Water, will produce, 150,000 gallons of water.It will charge $0.22 for this amount of output, and its profit is $11,000.

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