Monopoly Production and Marginal Revenue Analysis
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Monopoly Production and Marginal Revenue
Understanding the Demand Curve and Marginal Revenue
Median income is the price at which a certain quantity (x units) is sold on the demand curve. To maximize profit, a monopolist needs to understand their marginal revenue. Marginal revenue is the change in total revenue when the production level varies. Table 1 (not provided) shows the average total income, demand curve, and marginal revenue curve. Observe that income is zero when the price is $6; at that price, nothing is sold. When one unit is sold at $5, the total revenue is $5. Increasing sales from one to two units increases income from $5 to $8, so the marginal revenue is $3. If sales increase from two to three units, marginal revenue falls to $1, and increasing from three to four units makes marginal revenue negative.
When the demand curve slopes downward, the price is higher than the marginal revenue. To sell an additional unit, the monopolist must lower the price on all units sold, not just the additional one. In Table 1, when production increases from one to two units and the price is reduced to $4, this affects the revenue generated by all units sold.
Production Decisions and Profit Maximization
Graph 2 (not provided) illustrates that marginal revenue is higher than marginal cost. If the monopolist produces more than Q1, they would gain additional benefits and increase their total profit. The monopolist could continue increasing production until reaching the production level Q*, where the added benefit of producing one more unit is zero. Therefore, producing a smaller quantity like Q1 does not maximize profit, even though it allows the monopolist to charge a higher price. If the monopolist produces Q1, their profit would be lower. In Graph 2, the larger quantity Q2 maximizes profit. With marginal cost and marginal revenue, profit is maximized when marginal cost equals marginal revenue.
Graphs 3 and 4 (not provided): Graph 3 shows total income (I), total cost (C), and profit (the difference between the two). Graph 4 shows...