Monopoly Profit-Maximization by Analyzing a Table
Consider the following table with cost and revenue data for a hypothetical monopolist:
|Quantity||TFC||TVC||TC||AVC||ATC||MC||Price||Total Revenue||Marginal Revenue|
Problem: What are the profit-maximizing output and price for the above monopolist? What is the profit at this output? What is the average profit at this output?
Solution: Like the purely competitive firm, a monopolist maximizes profits at the quantity where marginal cost and marginal revenue are equal, or where marginal cost comes closest to marginal revenue, as long as marginal cost does not exceed marginal revenue, marginal cost is not falling, and price exceeds average variable cost.
Applying the profit-maximizing rule, we conclude that the firm maximizes profits at
|Quantity||= 600 units|
|Profit (TR-TC)||= $19,200-$15,000 = $4,200|
|Average Profit (TP / Q)||= $7 ($4,200 / 600)|
For a video explanation of a monopoly firm’s profit maximization using a table, please watch:
Monopoly Profit-Maximization by Analyzing a Graph
In a table, we find the profit-maximizing output by identifying the point at which marginal cost and marginal revenue are equal, as long as marginal cost does not exceed marginal revenue, marginal cost is not falling, and price exceeds average variable cost.
The graph below indicates that at output Qpm, marginal cost equals marginal revenue in the upward sloping portion of the marginal cost curve. At this output, the price is Ppm. For a monopolist, the marginal revenue curve and the demand (price) curve are different. Therefore, marginal revenue and price at the profit-maximizing output are different. From the MC=MR point, go straight up to the demand curve in order to identify the profit-maximizing price. This price is greater than the firm’s average variable cost, so the company will not need to shut down. The price is also greater than the firm’s average total cost, so the company is making an economic (above-normal) profit. Because there are barriers to entry into this industry, it is possible that the firm can continue to make economic profits in the long run, as well.
For a video explanation of a monopolist’s profit-maximizing quantity and price using a graph, please watch: