Question

If a monopoly firm is currently produce 100 units of outputs where price equals $7, average total cost equals $8 and marginal cost is increasing. Use ONE diagram to answer the following parts.

a) Draw a graph showing a monopolist in this short-run equilibrium. No explanation is required. Label the critical values on the diagram if the data are provided.

b) Calculate the amount of profit or loss. Indicate the area of it in your diagram.

c) How can an increase in demand help the monopolist to change the current situation of profitability from bad time to good time? Explain with the aid of your diagram. Label the areas of profit and loss clearly.

Answer 1

a = loo unite P= 87 Ата - то Me is increasing diagram depicts clearly that run equilibrium in the occurs at point where The cout mony MR 2 MC. Price - 100 o duantity (b) Since PCATC, the firm is earning losses & gains & (P-ATC) XQ = (7-8) too Gain = – $1oo. Thus, losses - $100. Increase in demand will shift the demand avere upwards to d' and MR' is the new marginal revenue come The new equilibrium occurs at point c and new frieces. areater than than & Anerage greater Cost and thus the firm is earnings profite represented by area (AB CD) .