A monopolist is currently producing a level of output where Price = $110; Marginal Revenue = $10; Quantity = 100; Total Cost = $15,000; Marginal Cost = $10; Total Fixed Cost = $4,000.
1. To maximize profits in the short-run, the monopolist should:
(a) Increase output
(b) Decrease output
(c) Produce the same output
(d) Shut down
(e) None of the above
2. To maximize profits in the long-run, the monopolist should:
(a) Increase output and remain open
(b) Decrease output and remain open
(c) Produce the same output and remain open
(d) Shut down
(e) None of the above
My answer:
a)
MR=MC so no need to change output and P>AVC (110>11) so don't shut down. Therefore, ;eave output the same.
b)
MR=MC so don't change output and P>ATC (110> 15) so don't shut down. Again. ;eave output te same.
For part B, it says the answer is to shut down. Could someone pleeease help me. Thanks
In the short-run, to maximize profits, the monopolist should produce the same output. This is because the condition for profit maximization is MR = MC, which means that as long as marginal revenue is equal to marginal cost, the monopolist is already producing the optimal level of output. Therefore, the answer to question 1 is (c) Produce the same output.
In the long-run, to maximize profits, the monopolist should shut down if it is unable to cover its total costs. In this case, the given information states that Total Cost is $15,000 and Total Fixed Cost is $4,000. If the monopolist decides to shut down, it would avoid the variable costs associated with production, which are the marginal costs. Since Marginal Cost is $10 and the monopolist is producing 100 units of output, the variable costs would be $10 x 100 = $1,000.
The monopolist's total costs would then be $4,000 + $1,000 = $5,000. If the monopolist is unable to cover this amount with the revenue it receives, it would be better off shutting down in the long-run. However, if the monopolist can cover its costs, it should continue producing and remain open.
Considering that the given price is $110 and the monopolist is producing 100 units, the revenue would be $110 x 100 = $11,000. Since the revenue of $11,000 is greater than the total costs of $5,000, the monopolist should continue producing. Therefore, the answer to question 2 is (a) Increase output and remain open.
So, the correct answers are:
1. (c) Produce the same output
2. (a) Increase output and remain open
To determine the correct answer for each question, let's analyze the given information step-by-step:
1. To maximize profits in the short-run, a monopolist should consider two conditions: MR (marginal revenue) equals MC (marginal cost), and P (price) must be greater than AVC (average variable cost).
Given:
- Price (P) = $110
- Marginal Revenue (MR) = $10
- Marginal Cost (MC) = $10
Checking the conditions:
- MR = MC: In this case, MR is not equal to MC ($10 ≠ $10).
- P > AVC: We need to calculate the AVC.
AVC = Total Variable Cost (TVC) / Quantity (Q)
TVC = Total Cost (TC) - Total Fixed Cost (TFC)
TVC = $15,000 - $4,000 = $11,000
AVC = $11,000 / 100 = $110
Given that $110 > $110, the condition P > AVC is false.
Therefore, the monopolist should neither increase nor decrease the output but rather produce the same output quantity. The correct answer is (c) Produce the same output.
2. To maximize profits in the long run, a monopolist should consider two conditions: MR equals MC, and P must be greater than ATC (average total cost).
Given:
- Price (P) = $110
- Marginal Revenue (MR) = $10
- Marginal Cost (MC) = $10
Checking the conditions:
- MR = MC: Once again, MR is not equal to MC ($10 ≠ $10).
- P > ATC: We need to calculate the ATC.
ATC = TC / Q
ATC = $15,000 / 100 = $150
Given that $110 < $150, the condition P > ATC is false.
Therefore, the monopolist should shut down in the long run. The correct answer is (d) Shut down.
In summary:
1. To maximize profits in the short run, the monopolist should produce the same output.
2. To maximize profits in the long run, the monopolist should shut down.