Final answer:
This question explores how a monopolist determines the profit-maximizing output and price, highlighting the importance of the intersection of marginal revenue and marginal cost and the effect of a demand increase on these metrics.
Step-by-step explanation:
The question is centered on the concept of how a monopoly determines the profit-maximizing quantity to produce and at what price to sell.
To find this point, a monopolist will look at where marginal revenue (MR) equals marginal cost (MC). We begin by drawing the demand curve, which reflects the maximum price that can be charged at each quantity level.
Then, we calculate the total revenue (price multiplied by quantity) and use changes in total revenue to derive the marginal revenue curve. Marginal cost is calculated by the change in total costs for an additional unit produced.
When the demand for the product increases dramatically, the demand curve shifts to the right, leading to higher total revenue at each quantity.
Consequently, the marginal revenue curve also shifts to the right. The marginal cost curve might not change because marginal costs are associated with production costs, which are not directly affected by changes in demand. The new profit-maximizing quantity will be at the new point where MR equals MC, and the monopolist can charge a higher price because of the increased demand.
Thus, an increase in demand for a monopolist's product leads to a higher quantity supplied and a higher price. This exercise demonstrates the dynamics of monopoly pricing and output decisions in response to changes in market demand.