Chapter 9: Q 19. (page 233)
What is the usual shape of a marginal revenue curve for a monopolist? Why?
The usual shape of a marginal revenue curve for a monopolist is downward sloping as the addition of each additional unit will increase the output which will decrease the price of the output.
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Return to Figure . Suppose is and is . Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling units of output. Estimate from the graph what the new firm’s average cost of producing output would be. If the incumbent continues to produce units, how much output would the two firms supply to the market? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn?
Draw a monopolist’s demand curve, marginal revenue, and marginal cost curves. Identify the monopolist’s profit-maximizing output level. Now, think about a slightly higher level of output (say ). According to the graph, is there any consumer willing to pay more than the marginal cost of that new level of output? If so, what does this mean?
Imagine that you are managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and you have calculated that you can make a nice profit charging less than the monopolist. Before you go ahead and challenge the monopolist, what possibility should you consider for how the monopolist might react?
When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge?
How can a monopolist identify the profit-maximizing level of output if it knows its marginal revenue and marginal costs?
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