A Monopoly's Total, Average, and Marginal Revenue Average Quantity Price Total Revenue Revenue Marginal Revenue ( P (TR=PXQ)(AR=TR/Q)(MR=ATR/AQ) $11.00 $000 Q012345678 $1000 1000 1000 $1000 900 1800 900 800 800 2400 800 600 $700 $2800 $700 4.00 s600 $3000 600 $200 500 $3000 500 s000 400 2800 4.00 $200 $300 $2400 $300 -$4.00 Harcourt, Inc. items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Monopoly’s Total, Average, and Marginal Revenue Quantity (Q) Price (P) Total Revenue (TR=PxQ) Average Revenue (AR=TR/Q) Marginal Revenue (MR= ) 0 $11.00 $0.00 1 $10.00 $10.00 $10.00 $10.00 2 $9.00 $18.00 $9.00 $8.00 3 $8.00 $24.00 $8.00 $6.00 4 $7.00 $28.00 $7.00 $4.00 5 $6.00 $30.00 $6.00 $2.00 6 $5.00 $30.00 $5.00 $0.00 7 $4.00 $28.00 $4.00 -$2.00 8 $3.00 $24.00 $3.00 -$4.00 DTR / DQ
A Monopoly's Marginal Revenue A monopolist's marginal revenue is always less than the price of its good. .The demand curve is downward sloping. o When a monopoly drops the price to sell one more unit. the revenue received from previously sold units also decreases. H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Monopoly’s Marginal Revenue A monopolist’s marginal revenue is always less than the price of its good. uThe demand curve is downward sloping. uWhen a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases
A Monopoly's Marginal Revenue When a monopoly increases the amount it sells. it has two effects on total revenue(PX Q). The output effect--more output is sold, so Q is higher. The price effect--price falls, so P is lower H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Monopoly’s Marginal Revenue When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q). uThe output effect—more output is sold, so Q is higher. uThe price effect—price falls, so P is lower
Harcourt, Inc. items and derived items copyright C 2001 by Harcourt, Inc Demand and Marginal Revenue Curves for a Monopoly. Price $11 10 9876543210123 Demand Marginal (average revenue) revenue 1H 1 2 4 56 8 Quantity of Water
Demand and Marginal Revenue Curves for a Monopoly... Quantity of Water Price $11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 1 2 3 4 5 6 7 8 Marginal revenue Demand (average revenue) Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc
Profit Maximization of a Monopoly A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost eIt then uses the demand curve to find the price that will induce consumers to buy that quantity. H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Profit Maximization of a Monopoly u A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost. u It then uses the demand curve to find the price that will induce consumers to buy that quantity