MONOPOLY MAXIMIZATION A monopoly is a firm that is the exclusive seller of a product with which there are no close substitutes. The monopoly retains this control because it is not possible for other firms to enter into that particular market; therefore, eliminating competition over the selling of that product. The fundamental difference between a competitive firm and a monopolistic firm is the monopoly’s influence over the price of its product or output. This arises because a competitive firm is too small in relation to its market in which it operates to have any control over the price of its output. However, a monopoly does not face this dilemma because it is the only producer in its market so it adjusts the price of its output by simply changing the quantity it supplies. This illustrates the characteristic of a monopolistic firm as a price maker. Since monopolies are the only producer in its market and are price makers they face a downward sloping market demand curve and thus must sell at a lower price in order to sell more output. Like a competitive firm, a monopoly operates at maximum profit where its marginal revenue equals its marginal cost. However, its marginal revenue curve is no longer equal to its demand curve because the downward sloping quality of its demand curve causes the monopoly to lower its prices in order to increase the quantity, resulting in less revenue per extra unit of output. Therefore, in order to find the price a monopoly charges you must determine the profit-maximizing quantity where its marginal revenue equals its marginal cost and then go up to its demand curve at that quantity. A monopolist operates under a production technology which allows the production of any output level at a constant average cost of $5 per unit. This monopolist sells into two distinct markets the demand curves for which are: P1=55-Q1 (for market one) and Q2 = 70 – 2P2 Profit Maximisation occurs where MR=MC In this example MC = $5 (a constant average cost means the MC=AC) Therefore, $5 = 55 – 2P1 2P = 50 Therefore, P=25 To find out the Quantity we put 25 into the equation Q=55-25 Q=30
Posted on: Wed, 16 Jul 2014 15:24:17 +0000
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