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Chapter 8 Applicable Questions

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MBA502 Economic Theory and Applications: Chapter 8 Applicable Questions (Pg: 220):

1) Find and label the monopolist’s profit-maximizing output and price: The chart shown below represents monopolistic competition, short run. P MC P1

MR D 0 Q1 Q At: Q1 MR=MC; P > MC/ATC (ATC not at minimum) A monopolistically competitive company reaches the maximum-profit output at the point where marginal revenue (MR) is equal to marginal cost. Profit will be greater than marginal cost and average total cost. At this point, profits cannot be increased by changing the production level. Increases in production will cause a decline in profits, because it adds more to cost. Decreasing production will decrease revenue, since there will less inventory to sell. The profits shown in this graph cannot be maintained, since other firms will also produce similar products. This causes the demand curve to become more elastic, and shift back toward the origin, until it becomes tangent to the average total cost (ATC) curve. The underlying logic in identifying maximization of profit through marginals is: a) Marginal revenue will show how total revenue is changed by increases or decreases in units of production. b) Marginal cost shows how much change in total cost is changed by one more or one less unit of production.

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