You want to determine the profit-maximizing production quantity for a monopolist. You can ask the firm's consultant to draw the firm's revenue and cost curves, but each curve would cost you $1,000. From the following list indicate which curves you will request and why? a) Average total cost, b) average fixed cost, c) average variable cost, d) marginal cost, e) demand, and f) marginal revenue.

Question

You want to determine the profit-maximizing production quantity for a monopolist. You can ask the firm's consultant to draw the firm's revenue and cost curves, but each curve would cost you $1,000. From the following list indicate which curves you will request and why? a) Average total cost, b) average fixed cost, c) average variable cost, d) marginal cost, e) demand, and f) marginal revenue.

Answer 1

To determine the profit-maximizing production quantity for a monopolist, you will need certain cost and revenue curves. However, since each curve comes at a cost of $1,000, it is important to prioritize the most essential curves that will provide crucial information.

Here's a breakdown of the curves you should request and why:

1. Demand (e): Requesting the demand curve is essential as it shows the relationship between the price of the monopolist's product and the quantity consumers are willing to purchase at each price. Understanding the demand curve is crucial for determining the optimal price and quantity that will maximize profit.

2. Marginal Revenue (f): Requesting the marginal revenue curve is vital as it represents the change in total revenue resulting from producing and selling one additional unit of output. The profit-maximizing quantity occurs where marginal revenue equals marginal cost, so having the marginal revenue curve is essential for this calculation.

3. Marginal Cost (d): Requesting the marginal cost curve is important as it portrays the cost of producing one additional unit of output. To achieve profit maximization, the monopolist should produce up to the point where marginal cost equals marginal revenue. Hence, the marginal cost curve helps in determining the optimal quantity to produce.

These three curves (demand, marginal revenue, and marginal cost) are the most crucial for determining profit-maximizing production quantity. While the other cost curves (average total cost, average fixed cost, and average variable cost) provide valuable insights into the firm's cost structure, they are not essential for specifically identifying the profit-maximizing quantity.