5 You are a monopolist facing the following demand sched ule

5. You are a monopolist facing the following demand sched- ule. You produce a good at a constant marginal cost of $4 per unit. Price $14 $12 $10 $8 Quantity 2 4 a. Calculate the marginal revenue for each row (assume revenue is zero when quantity is zero). b. What is the profit-maximizing quantity? Try to an- swer the question without actually calculating profit. c. Assuming a fixed cost of $10 to operate, what is the profit?

Solution

a. We can show the total revenue and marginal revenue in the following table:

Quantity

Price

Total Revenue

Marginal Revenue

1

$14

$14

$14

2

$12

$24

$10

3

$10

$30

$6

4

$8

$32

$2

b. As marginal cost is fixed and = $4/unit

From the given table it is clear that with every increase of quantity, price falls by $2. Therefore, when quantity = 6 units, the price = $4 which is equal to marginal cost.

Also under profit maximization condition of a monopoly,

                    Marginal cost= average cost= Price

therefore, profit maximization output is 6.

c. We can show profits for different quantity in the following table:

Quantity

Price

Total Revenue

Marginal Revenue

Profit = Total Revenue-fixed cost

1

$14

$14

$14

$4

2

$12

$24

$10

$14

3

$10

$30

$6

$20

4

$8

$32

$2

$22

Quantity	Price	Total Revenue	Marginal Revenue
1	$14	$14	$14
2	$12	$24	$10
3	$10	$30	$6
4	$8	$32	$2