Monopoly Equilibrium In Graph

Figure 9-4 shows the monopoly equilibrium. Part (0) combines the firm’s cost and revenue curves . . The maximum-profit point comes at that output where MC equals MR. which is given at their in- ‘tersection at E. The monopoly equilibrium, ormaxirnum profit point, is at an output of q* = 4. To find the profit-maximizing price, we run vertically up from E to the DD curve at G,where P” = 5120. The fact that average revenue at G lies above a”erage cost at F guarantees a positive profit. The actual amount of profit is given by the blue area in Figure 9-4(a).

The same story is told in part (b) with curves of total revenue, cost, and profit. Total revenue isdomeshaped, Total cost is ever rising. The vertical difference between them is total profit, which begins negtion of maximum profit is found. Any move from E will lose some profit. Price is on the demand curve at G, above E; and since Pis above AC, the maximized profit is a pasiti~ e profit, (Can you explain why the blue shaded rectangle measures total profit? And why the gray triangles of shading on either’ side of E show the reduction in total profit that would come from a departure from MR = MC?) Panel (b) tells the same story of maximizing profit as does (a), but it uses total concepts rather than marginal concepts, Total profit (TP) is given by the vertical distance

from TC lip to TR. TP is at a maximum where its thin black slope is zero. At the maximum-profit point, the total revenue and total cost curves are parallel and therefore have equalslopes, MR,= Me ative and ends negative. hi between. TP is positive. reaching its maximum of $230 at q* = 4. At the maximum- profit output. the black slopes of TR and TC (which are Am and MC at those points) are parallel and therefore equal. If the slopes were pointing outward in a nonparallel fashion (as at q = 2). the firm would gain extra profit by expanding q. At q* = 4•. marginal cost and marginal revenue are balanced. At’ that point total profit (TP) reaches its maximum. as an additional unit adds exactly equal amounts to costs and revenues.

A monopolist will maximize its profits by setting output at the level where MC = MR Because the monopolist has a downward-sloping demand curve. this means that P> MR. Because price is above marginal. cost for a profit-maximizing monopolist. the ,rnonopolist reduces output below the level that would be found in a perfectly competitive industry.

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