If a monopoly is producing at an output where its average total cost of production is minimized and equals $50 per unit and marginal revenue equals $60, is the monopoly producing at the profit-maximizing output level? Explain why or why not.
Not profit maximizing.
At the minimum of the AC curve it must be true that MC=AC. So, MC=$50 and MR =$60. The firm could do better by producing more as the marginal revenue from selling one more unit exceeds the marginal cost of producing that extra unit.
To determine whether the monopoly is producing at the profit-maximizing output level, we need to analyze its decision-making process.
In a monopoly, profit maximization occurs when marginal revenue (MR) is equal to marginal cost (MC). If MR is greater than MC, the monopoly should increase production to maximize its profits. If MR is less than MC, reducing production would be more profitable.
In this case, we know that the marginal revenue is $60. However, we do not know the marginal cost (MC) at this point. To determine if the monopoly is producing at the profit-maximizing output level, we need to compare MR with MC.
To find MC, we need additional information about the cost structure. The given information states that the average total cost (ATC) is minimized at $50 per unit. For a monopoly, ATC is equal to MC at the output level where ATC is minimized.
So, we have:
ATC = MC = $50
Since the average total cost and marginal cost are equal, we can assume that the marginal cost is also $50 per unit.
Now we can compare MR ($60) with MC ($50).
If MR > MC, producing more units will increase profits. However, in this case, MR ($60) is greater than MC ($50). Thus, producing an additional unit will result in additional revenue that exceeds the additional cost. Therefore, the monopoly is not producing at the profit-maximizing output level.
The profit-maximizing output level is achieved when MR = MC. Since MR ($60) is greater than MC ($50) in this scenario, the monopoly is not producing at the profit-maximizing output level and could increase production to maximize its profits.