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Chapter 15: Problem 3

Draw a graph that shows a monopolist earning a profit. Be sure your graph includes the monopolist's demand, marginal revenue, average total cost, and marginal cost curves. Be sure to indicate the profit-maximizing level of output and price.

Short Answer

Expert verified
To illustrate a monopolist earning a profit via a graph: First, draw the demand curve (downward sloping) and the marginal revenue curve (below the demand curve, also downward sloping). Then, draw the average total cost (U-shaped) and the marginal cost (cuts the ATC at the lowest point) curves. The monopolist's profit-maximizing output and price is where the MC intersects the MR. That vertical line up to the demand curve indicates the profit-maximizing price. The total profit can be shown as the shaded area between the ATC and the demand curve, from the origin to the profit-maximizing quantity.

Step by step solution

01

Draw the Axes

Begin by drawing the graph's two axes. The horizontal axis (X-axis) represents the monopolist's quantity of output, while the vertical axis (Y-axis) shows price and costs.
02

Draw the Demand Curve

Next, draw the demand curve, which slopes downward from left to right. This high-to-low slope indicates that as price decreases, demand increases, and vice versa.
03

Draw the Marginal Revenue Curve

Now draw the marginal revenue curve, which is below demand curve and also slopes downward; it represents the additional revenue that the monopolist gains due to a one-unit increase in output.
04

Draw the Average Total Cost and Marginal Cost Curves

Further down, draw the Average Total Cost (ATC) curve which typically has a U-shape. It represents the cost of each good manufactured. Draw the Marginal Cost (MC) curve that cuts the ATC at its lowest point. It also typically has a U-shape and represents the extra cost incurred in producing each additional unit of output.
05

Identify the Monopolist's Profit-Maximizing Output and Price

The point where the MC intersects the MR is the monopolist's profit maximizing output. Draw a vertical line from this point up to the demand curve to locate the profit-maximizing price.
06

Highlight the Area of Profit

The monopolist's total profit is represented by the shaded area between the ATC and the demand curve, from the origin to the profit-maximizing quantity.

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Most popular questions from this chapter

Why would it be economically efficient to require a natural monopoly to charge a price equal to marginal cost? Why do most regulatory agencies require natural monopolies to charge a price equal to average cost instead?

An article in the Wall Street Journal quoted a DOJ antitrust official as saying, "Mergers between substantial competitors, especially in already concentrated industries, can give companies far too much power over the markets in which they operate." a. What does the official mean by a "concentrated industry"? b. What does he mean by "power over the markets in which they operate"? c. The article also quoted the official as saying that mergers might benefit the public "when they bring together complementary assets, people and ideas that help lower production costs or spur greater innovation." Will these positive aspects of a merger always be enough to offset the negative aspects you discussed in answering part (b) of this problem? Briefly explain.

An article in the New Yorker noted, "The Bronx [borough of New York City] is home to 1.5 million people, two hundred thousand public-school students, eleven colleges and universities, and a single general-interest bookstore a Barnes \& Noble, located in the Bay Plaza shopping center." The article also noted that this bookstore closed at the end of 2016 . Would the only bookstore in the Bronx, or any other city, be considered a monopoly? If so, why would it have closed?

What is the purpose of the antitrust laws? Who is in charge of enforcing these laws?

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