advertisement

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