Monopoly Pricing
Use the graph below to answer the following questions about a monopoly firm.
1. What is the profit maximization output for this firm? How did you
determine it? 4. B/c that is the output where MC = MR.
2. What is the price the firm will charge at that output? 8.
3. What is the revenue per unit at that output? 8. (AR is revenue per unit)
4. What is the cost per unit at that output? 6 (ATC is cost per unit)
5. What is the profit or loss per unit at that output? 2 (AR – AC)
6. What is the total revenue at that output? 32 (Q X P)
7. What is the total cost at that output? 24 (Q X P)
8. What is the total profit or loss at that output? 8 (TR-TC)
9. At what output and price combination would this firm break even? Just
over output of 6, just under price of 6. Break-even point is where AR =
AC
10. What will happen to this firm’s economic profits in the long run? Why?
Should stay abnormal b/c in a monopoly, there are major barriers to
entry.
11. Will this company be productively or allocatively efficient in the long
run? Why? No. B/c profit-maximizing level (MC = MR) is NOT where MC
= AR (allocatively efficient) or where MC = AC (productively efficient)