A Monopoly's Total, Average and Marginal revenue Average Quantity Price Total Revenue Revenue Marginal Revenue (Q) (TR=PXQ)(AR=TR/Q)(MR=ATR/AQ $1100 0.00 $1000 $10.00 $1000$10.00 012345678 900 $1800 900 800 s800 $2400 800 6.00 700 2800 $7.00 4.00 600 $3000 600 200 $500 30.00 $500 s000 4.00 $2800 4.00 $200 $300 2400 $300 400
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 Total, Average, and Marginal Revenue
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 When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases o 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
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. – When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases. • When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q). – The output effect—more output is sold, so Q is higher. – The price effect—price falls, so P is lower
Demand and Marginal revenue Curves for a monopoly Price $1 10 8 65432101234 Demand Marginal (average revenue) revenue 12345 78 Quantity of wa
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) Demand and Marginal Revenue Curves for a Monopoly
Profit Maximization of a Monopoly A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost e It then uses the demand curve to find the price that will induce consumers to buy that quantity
Profit Maximization of a Monopoly • A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost. • It then uses the demand curve to find the price that will induce consumers to buy that quantity
Profit-Maximization for a monopoly. 2.... and then the demand Costs and curve shows the price 1. The intersection of Revenue consistent with this the marginal-revenue quantity curve and the marginal cost curve determines Monopoly B the profit-maximizing quantity p rice Average total cost A Demand Marginal cost Marginal revenue Q MAX Quantity
Monopoly price 0 QMAX Quantity Costs and Revenue Demand Average total cost Marginal revenue Marginal cost A 1. The intersection of the marginal-revenue curve and the marginalcost curve determines the profit-maximizing quantity... B 2. ...and then the demand curve shows the price consistent with this quantity. Profit-Maximization for a Monopoly