Final answer:
To maximize profit, a monopolist sets the price at the highest level consumers are willing to pay for the profit-maximizing quantity of output, found where the marginal revenue curve intersects the demand curve. This ensures significant profits are realized, as seen when comparing total revenues and total costs.
Step-by-step explanation:
Maximizing Profit Through Price Setting
To determine the price to maximize profit in a monopoly, we need to understand the relationship between the monopolist's pricing strategy and their profit-maximizing output level. According to the model provided, we know that the profit-maximizing price is not directly given but can be deduced by knowing that x represents the change in price from an initial price, often the base price of $22 in a given scenario. To find the optimal price, a monopolist will look at the profit-maximizing quantity of output first, which is found at the point where marginal revenue equals marginal cost.
Once they have that quantity, they will determine the price consumers are willing to pay by extending a line up from this quantity to intersect the demand curve on a graph (referred to as the 'dotted line'). The intersection on the demand curve represents the highest price consumers are willing to pay for that quantity of goods, which is the optimal price. For example, if the model shows 5 units as the profit-maximizing quantity and the average cost for producing the units is $330, then the firm would charge $800 per unit, since it's the market Willingness to pay as shown in the demand curve, leading to total revenues of 5 x $800 = $4000, with profits calculated as $4000 - (5 x $330 = $1650) = $2350. A monopolist can sustain such profits due to barriers that protect its market from entry by competitors.
Therefore, the best price to charge in order to maximize profit is one that corresponds to this profit-maximizing output on the firm's demand curve, which is above the average cost and allows the firm to realize significant profits.