6.2 Monopoly
 Monopolist can maximize profit by first finding the appropriate
quantity of output, then determining the highest possible price
it can charge
 To maximize profit, a business must find a point at which
marginal revenue and marginal cost intersect
 Then, drawing a vertical line up to demand curve, and the
corresponding y-value of this point is the price
Profit Maximization for a Monopolist
 On the graph:
 Profit-maximizing output is at intersection of MR and MC
 At this output, demand curve gives a price of $10 (draw vertical
line up to demand curve then see corresponding y-point)
 The profit of this company is the difference between price (D)
and average cost (ATC) – the area of the rectangle
 (600x (10 – 8.40))
Monopoly vs Perfect Competitor
 Recall:
 Demand Curve and Marginal Revenue Curve were the same for
a Perfect Competitor
 Now:
 Marginal Revenue Curve is steeper than Demand Curve (not
same curve anymore) for Monopoly
Regulation of Natural Monopolies
 Natural Monopoly:
 Increasing returns to scale mean that the single business can
produce a product at a significantly lower per-unit cost than
could several companies
 Governments usually intervene on natural monopolies:
 Service is provided through a government-owned corporation
 Canada Post
 Gov’t regulates the single private company
 Canadian Radio-television and Telecommunications Commission
Regulation of Natural Monopolies
 Public Agencies set a price for the monopolist to charge:
 Average-cost Pricing: the practice of setting price it equals average
cost
 The regulating agency imposes a ceiling, such as 8 percent or 9
percent, on the profit rate the businesses can earn