Dickert-Conlin, Conlin
Econ 301, Fall 2006
Lectures Notes for Monopolies
3 assumptions;
1) There is a single seller.
2) There are no close substitutes for the product.
3) There are extremely high barriers to entry
Q
P
0
1
2
3
4
5
6
7
8
9
10
10
9
8
7
6
5
4
3
2
1
0
TOTAL REVENUE
(TR)
0
9
16
21
24
25
24
21
16
9
0
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
MARGINAL
REVENUE (MR)
12
11
10
9
8
7
6
5
4
3
2
1
0
D
1
Profits of Monopolist.
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
MC
ATC
AVC
10
11
12
10
11
12
9
8
7
6
5
4
3
2
1
0
D
Not all Monopolists make positive profits.
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
MC
ATC
AVC
9
8
7
6
5
4
3
2
1
0
D
2
The graph below depicts the cost curves and demand for a monopolist.
20
18
MC
16
14
ATC
12
$/unit
AVC
10
D
8
6
4
2
0
0
1
2
3
4
5
6
7
8
9
10
Q 11
Profits at different output levels.
Output
Total Revenue=p*q
3
17*3=51
4
16*4=64
5
15*5=75
6
14*6=84
12
13
14
15
16 17
Total Cost=ATC*q
13.3*3=40
11.75*4=47
11.2*5=56
11.17*6=67
18
19
20
Profits
51-40=11
64-47=17
75-56=19
84-67=17
The Marginal Revenue (MR) of the 4th unit is $13 and the Marginal Cost (MC) is 7.
Therefore, profits increase by MR-MC=$6 if produce output of 4 compared to an output
of 3. (From above table, you can see that profits increase by 17-11=6 if produce 4th unit.)
The Marginal Revenue (MR) of the 5th unit is $11 and the Marginal Cost (MC) is 9.
Therefore, profits increase by MR-MC=$2 if produce output of 5 compared to an output
of 4. (From above table, you can see that profits increase by 19-17=2 if produce 5th unit.)
The Marginal Revenue (MR) of the 6th unit is $9 and the Marginal Cost (MC) is 11.
Therefore, profits increase (or decrease in this case since it is negative) by MR-MC=-$2 if
produce output of 6 compared to an output of 5. (From above table, you can see that
profits increase (or decrease in this case since it is negative) by 17-19=-2 if produce 6th
unit.)
3