Question

The monopolist wants to maximize its profits or minimize its losses. Analyze the case and give a recommendation as to what the monopolist should do based on the possible recommendations provided below. Explain how you reached this recommendation and the reasons for it.

Possible Recommendations:

a. Increase production and reduce the price.
b. Decrease production and raise the price.
c. Shut down.
d. The monopoly is currently at the correct position.

CASE:

Price=3
Quantity of Output=1500
Total Cost=4500
Average Cost= (must find)
Marginal Revenue=2
Total Revenue= (must find)
Fixed Costs= (must find)
Marginal Cost=3

Answer 1

The monopolist has a marginal revenue of 2 and a marginal cost of 3. To maximize profits, they should not increase output, instead, they should decrease production and raise the price until marginal revenue equals marginal cost. This is based on the profit-maximization rule that a firm should produce up to the point where MR = MC.

Step-by-step explanation:

To analyze the monopolist’s situation, we need to first determine the average cost, total revenue, and fixed costs based on the information provided. The average cost (AC) equals total cost (TC) divided by quantity (Q), so AC = 4500 / 1500, which equals 3. The total revenue (TR) is calculated by multiplying the price (P) by the quantity (Q), which gives us TR = 3 x 1500, totaling 4500. Since we do not have direct information about fixed costs, we can infer that they are the difference between total costs and variable costs but without additional data, we cannot calculate the exact fixed costs.

To recommend what the monopolist should do, we compare the marginal revenue (MR) and marginal cost (MC). In this case, the MR is 2, and the MC is 3. According to the profit-maximization rule, the monopolist should continue producing as long as MR > MC. Here, since MR < MC, the firm should not increase output. Instead, it should reduce output until MR = MC. If the firm cannot adjust production to reach MR = MC, it may need to consider shutting down if it is incurring losses in the short run that are greater than its fixed costs, or continue operating if it can cover its variable costs in the short run.

Given the current situation where MR < MC and assuming that the price and marginal costs cannot be adjusted, the recommendation is to decrease production and raise the price (b), provided this leads to a point where MR = MC.