Chapter 10, Problem 1RQ

To determine

The output adjustment under monopoly for increasing profit.

Explanation of Solution

The monopoly is a market structure where there is only one seller selling the unique product and the seller faces the downward sloping demand curve. The monopolist would always try to maximize the economic profit from the market. The profit maximizing level of monopolist output is obtained at the point where the marginal revenue of the monopolist equals with the marginal cost of the monopolist. When the marginal cost of producing the output is lower than the marginal revenue, the monopolist can further increase the output and increase the profit until it reaches the point where marginal revenue and cost are equal with each other.

When the marginal revenue is lower than the marginal cost of production, the revenue of the monopolist is less than the cost. Thus, the higher cost becomes an economic loss for the monopolist. Thus, at this point of economic loss, the firm should stop producing the output and it should revert back to the level where the marginal cost of production is equal to the marginal revenue. Thus, the profit of the monopolist would be maximized. The profit maximizing output can be illustrated as follows:

Here, in the figure, the initial level of production is at the price P' and quantity Q'. Here, the marginal cost of production is higher than the marginal revenue of the monopolist, which means the production incurs loss for the monopolist. Thus, the monopolist should decrease his production to the point where the marginal revenue equals the marginal cost. This is obtained at the point where the quantity is Q* and the price is P* in order to avoid the economic loss to maximize the economic profit of the monopolist.

Economics Concept Introduction

Monopoly: The monopoly is a market structure where there is only one seller selling the commodity. There will be very strong barriers to entry into the market.