Monopoly Profit
Kevin Hinde
A simple example
 Assume
a linear demand and constant
marginal (and so average) costs.
 We will use a numerical example.
Total Revenue
Price
6
5
4
3
2
1
0
Quantity
0
1
2
3
4
5
6
Total Revenue
0
5
8
9
8
5
0
Can you work out the demand, total revenue and marginal revenue
functions from this information?
Demand and Total Revenue
TR
Graph A
9
0
Price 6
TR
6
3
D
Q
Graph B
3
0
3
AR = D
6
Q
Marginal Revenue
TR
C
A
Graph A
B
TR
0
Q
P,MR
Graph B
A
C
0
X
Q1
Q2
MR
AR = D
Q
Costs and profit
TC
Graph A
TC
0
MC
Q
Graph B
MC=AC
0
Q
Profit maximisation under perfect competition
TR, TC
Graph A
TC
X
TR
0
P,MR,
MC
Q
Graph B
Y
0
MR
Qpc
MC=AC
AR = D
Q
Profit maximisation under monopoly
TR,TC
C
Graph A
TC
TR
0
P,MR,
MC
Q
Graph B
X
0
Qm
MR
Qpc
MC=AC
AR = D
Q
Profit maximisation under monopoly
TR,TC
C
Graph A
TC
TR
0
P,MR,
MC
Q
Graph B
Pm
Ppc
0
Qm
MR
Qpc
MC=AC
AR = D
Q
Is monopoly profit ‘bad’?
Versus
Source: ww.freefoto.com
Answers to the quiz
P=6–Q
TR = 6Q – Q2
MR = 6 – 2Q
An extension
If Marginal Cost were 2 what would be the
monopoly profit maximising price and quantity
and how would this compare to perfect
competition?
Set MR = MC:
6 – 2Q = 2; Q = 2; P=4
Under perfect competition P = MC = 2 so Q = 4