Question

Consider a monopoly with the following Inverse Demand and Marginal Cost/Supply Curves:

Inverse Demand: P = 40 - 1.5Q Inverse Supply: P = 4 + 1.5Q

What is the marginal cost to the monopoly of producing its profit maximizing output in this market?

Answer 1

To determine the monopolist's profit-maximizing output level, we compare marginal revenue with marginal cost. If the demand increases, the marginal revenue will be higher. A consumer might be willing to pay more than the marginal cost for a slightly higher level of output.

Step-by-step explanation:

To determine the monopolist's profit-maximizing output level, we need to find the quantity where marginal revenue (MR) equals marginal cost (MC). In this case, the marginal cost is simply the slope of the inverse supply curve, which is 1.5. So the monopolist's profit-maximizing output level is where MR = 1.5.

If the demand for the monopoly's product increases dramatically and a new demand curve is formed, the marginal revenue will be higher because the new demand curve is steeper. The marginal cost curve remains unchanged. The monopolist will identify the new profit-maximizing quantity and price by finding the quantity where the new marginal revenue equals the unchanged marginal cost.

It is possible that a consumer is willing to pay more than the marginal cost of a slightly higher level of output. This means that the monopolist could potentially increase its profit by producing and selling that additional output.