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Transcript
Determining the Monopolist’s Profit-Maximizing Output and Price
A monopolist maximizes profit by producing at an output level at which marginal revenue
(MR) equals marginal cost (MC) but will charge a price as determined by the firm’s
demand curve.
A firm that is the sole producer of a product
and has zero costs will want to maximize its
total revenue. On a graph, it would try to
maximize the size of the total revenue
rectangle on the left.
To maximize revenue it would produce at an
output level where the marginal revenue curve
crosses the horizontal axis of the graph or
where MR = 0. The price it charges is the
price on the demand curve at that level of
output.
When a monopolist produces a product and
has to deal with production costs, it wants to
maximize profits not revenue.
Because profits are total revenue minus total
costs, the monopolist will produce up to the
point at which marginal revenue (MR) =
marginal cost (MC) and find the price at
that level on the demand curve.
On the left the firm with costs produces at
Q*m because at that point, additional sales
begin adding more to costs than they do to
revenue. The market price at that output is
P*m so price is greater than marginal revenue.
The economic intuition for choosing to
produce at the point where MR = MC is this:
as long as the firm can add more to total
revenue from an additional unit than is
subtracted from total revenue by its
production, the firm will produce it. After the
point where MR = MC, the additional cost of
the marginal unit is greater than the revenue
it brings in.