# Economics and Marginal Revenue

Topics: Economics, Marginal cost, Costs Pages: 5 (1004 words) Published: April 17, 2011
Ariel Conway

Student ID #: A08012684
South-9:30-ECO 2023
Problem #4

25-1
Suppose that it is the year 2038. Exclusive ownership of a resource found to be required for the production of fusion power has given a firm monopoly power in the provision of this good. What is true of the relationship between the price of this resource and the marginal revenue the firm receives?

25-1 (a)
The demand curve faced by the firm is the downward-sloping market demand curve, so price exceeds marginal revenue at all quantities beyond the first unit produced.

25-3
The following table depicts the daily output, price, and costs of a monopoly dry cleaner located near the campus of a remote college town. a. Compute the revenues and profits at each output rate.

b. What is the profit-maximizing rate of output?

25-3 (a)
(1)Output (suits cleaned)| (2)Price per Suit| (3)Total Costs| 0| 8.00| 3.00|
1| 7.50| 6.00|
2| 7.00| 8.50|
3| 6.50| 10.50|
4| 6.00| 11.50|
5| 5.50| 13.50|
6| 5.00| 16.00|
7| 4.50| 19.00|
8| 4.00| 24.00|

25-3 (b)
(1)Output (suits cleaned)| (2)Price per Suit| (3)Total Costs| (4)Total Revenue (4)=(2)x(1)| (5)Total Profit (5)=(4)x(3)| 0| 8.00| 3.00| 0| -3.00|
1| 7.50| 6.00| 7.50| 1.50|
2| 7.00| 8.50| 14.00| 5.50|
3| 6.50| 10.50| 19.50| 9.00|
4| 6.00| 11.50| 24.00| 12.50|
5| 5.50| 13.50| 27.50| 14.00|
6| 5.00| 16.00| 30.00| 14.00|
7| 4.50| 19.00| 31.50| 12.50|
8| 4.00| 24.00| 32.00| 8.00|

25-3 (c)
The profit-maximizing rate of output is between 5 and 6 units.

25-4
Given the information in Problem 25-3, calculate the dry cleaner’s marginal revenue and marginal cost at each output level. Based on marginal analysis, what is the profit-maximizing level of output?

25-4 (a)

(1)Output (suits cleaned)| (2)Price per Suit| (3)Total Costs| (4)Total Revenue (4)=(2)x(1)| (5)Total Profit (5)=(4)x(3)| (6)Marginal Cost(6)= (3)| (7)Marginal Revenue(7)= (4)| 0| 8.00| 3.00| 0| -3.00| | |

1| 7.50| 6.00| 7.50| 1.50| 3.00| 7.50|
2| 7.00| 8.50| 14.00| 5.50| 2.50| 6.50|
3| 6.50| 10.50| 19.50| 9.00| 2.00| 5.50|
4| 6.00| 11.50| 24.00| 12.50| 1.00| 4.50|
5| 5.50| 13.50| 27.50| 14.00| 2.00| 3.50|
6| 5.00| 16.00| 30.00| 14.00| 2.50| 2.50|
7| 4.50| 19.00| 31.50| 12.50| 3.00| 1.50|
8| 4.00| 24.00| 32.00| 8.00| 5.00| 0.50|

25-6
Use the graph to answer the following questions.

a. What is the monopolist’s profit-maximizing output?
b. At the profit maximizing output rate, what are average total cost and average revenue? c. At the profit-maximizing output rate, what are the monopolist’s total cost and total revenue? d. What is the maximum profit?

25-6 (a)
Monopoly Profit = Total Revenues- Total Costs
Approximately \$3.00

25-6 (b)
Average Total Costs = \$5.00
Average Revenues = \$2.00

25-6 (c)
Total Cost = \$4.50
Total Revenue = \$1.50

25-6 (d)
8,000 x \$1.50 = \$12,000

25-9
Consider the revenue and cost conditions for a monopolist that are depicted in the figure below.

a. What is this producer’s profit-maximizing (or loss-minimizing) output? b. What are the firm’s economic profits (or losses)?

25-9 (a)
The monopoly maximizes economic profits or minimizes economic losses by producing to the point at which marginal revenue is equal to marginal cost, which is 1 million units of output per month.

25-9 (b)
The profit-maximizing or loss-minimizing price of 1 million units per month is \$30 per unit, so total revenues equal \$30 million per month. The average total cost of producing 1 million units per month is \$33 per unit, so total costs equal \$33 million per month. In the short run, producing 1 million units minimizes the monopoly’s loss at \$3 million per month.

25-10
For each of the following examples, explain how and why a monopoly would try to price discriminate.

a. Air...