Monopoly Power and Profit Maximization Analysis

(a) Defining Monopoly Power

Level Marks

• 0: The work does not reach a standard described by the descriptors below. (0)
• 1: Vague definition. (1) The idea that the firm faces a negatively sloped demand curve OR that it arises when one firm dominates the market.
• 2: Accurate definition. (2) The ability of a firm to set the price.

(b) Calculating Monthly Profits for Firm A

Using the figures provided in Table 1, calculate the monthly level of profits Firm A is making at the current level of output, Q’.

• Total Revenue: 140 × 150,000 = $21,000,000 (1)
• Total Costs: 60 × 150,000 = $9,000,000 (1)
• Profit (π): TR – TC = $21,000,000 – $9,000,000 = $12,000,000 (1)

(c) Firm Analysis: P=AR > MR > AC > MC

(i) Perfect Competition Status

State the reason Firm A cannot be a perfect competitor: Price (or average revenue) is greater than (or is not equal to) marginal revenue. An answer which indicates that P > MR is sufficient for [1].

(ii) Profit Maximization Strategy

Determine whether Firm A should increase or decrease its level of output to maximize profits:

• 0: The work does not reach a standard described by the descriptors below. (0)
• 1: Correct answer with incorrect reasoning. (1) This firm should increase its level of output.
• 2: Accurate answer. (2) Since MR > MC (or $80 > $50), this firm should increase its level of output.

(iii) Total Revenue Impact

Determine whether total revenue will increase, decrease, or remain unchanged if Firm A increases output:

• 0: The work does not reach a standard described by the descriptors below. (0)
• 1: Correct answer without a valid reason provided. (1) Total revenue will increase.
• 2: Accurate answer. (2) Total revenue will increase because marginal revenue is positive, or increasing output by one unit will add $80.00 to total revenue.

(iv) Average Cost Trends

Describe how average cost will be affected if Firm A increases its level of output:

• 0: The work does not reach a standard described by the descriptors below. (0)
• 1: Correct answer without a valid reason provided. (1) Average cost will decrease.
• 2: Accurate answer. (2) Average cost will decrease since marginal cost is lower than average cost; therefore, producing an additional unit of output will reduce average cost.

(v) Productive Efficiency Assessment

Determine whether Firm A is productively efficient at the current level of output:

• 0: The work does not reach a standard described by the descriptors below. (0)
• 1: Correct answer with no valid reason provided. (1) The firm is not productively efficient.
• 2: Accurate answer. (2) The firm is not productively efficient because AC > MC, so AC is not at a minimum.