FIGURE 12.4 Profit maximization by a pure monopolist. The pure monopolist maximizes profit by producing at the MR = MC output, here Q = 5 units. Then, as seen from the demand curve, it will charge price P = $122. Average total cost will be A = $94, meaning that per-unit profit is P– A and total profit is 5 x (P - A). Total economic profit is thus represented by the green rectangle. $200 175 MC 150 Profit Pm = $122 per unit 125 Economic profit ATC 100 75 A = $94 50 MR = MC 25 MR Qm = 5 units 1 2 3 4 5 6 7 8 10 Q Quantity Price, costs, and revenue
1. The MR curve lies below the demand curve in this figure because the: a. demand curve is linear (a straight line). b. demand curve is highly inelastic throughout its full length. c. demand curve is highly elastic throughout its full length. d. gain in revenue from an extra unit of output is less than the
3. This pure monopolist: a. charges the highest price that it could achieve. b. earns only a normal profit in the long run. c. restricts output to create an insurmountable entry barrier. d. restricts output to increase its price and total economic profit. 4. At this monopolist’s profit-maximizing output: a. price equals marginal revenue. b. price equals marginal cost. c. price exceeds marginal cost. d. profit per unit is maximized.
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