Chapter 9: Problem 22

When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge?

Short Answer

Expert verified

In short, a monopolist decides the price to charge for its profit-maximizing quantity of output (Q*) by locating the point on the demand curve that corresponds to Q* and determining the highest price consumers are willing to pay for that output. The monopolist will then charge this price (P*) to maximize its profits.

Step by step solution

Understand the terms and the monopolist's goal

A monopolist is a single seller in a market who has the power to influence the price of a good or service. Profit maximization is the primary goal of a monopolist. To achieve this, the monopolist must find the quantity of output at which the difference between their total revenue (TR) and total cost (TC) is maximized. This occurs when their marginal revenue (MR) is equal to their marginal cost (MC).

Determine the profit-maximizing output level

The monopolist has already identified the profit-maximizing quantity of output. This is the quantity at which MR = MC, indicating that an additional unit of output would have no further impact on the profit. Let's call this quantity Q*.

Find the highest price the consumer is willing to pay for the profit-maximizing quantity of output

To determine the price at which the monopolist will sell their product, we must first analyze the relationship between the quantity of output and the demand curve. The demand curve shows the highest price that consumers are willing to pay for each quantity of output. Thus, to find the price the monopolist should charge at the profit-maximizing quantity of output (Q*), we must find the point on the demand curve that corresponds with Q*.

Establish the monopolist's price based on the demand curve

Now, locate the point on the demand curve that corresponds to the profit-maximizing quantity: Q*. The price associated with this point will be the price at which the consumers are willing to pay for that specific quantity. Since the monopolist wants to sell at a price the consumers will be willing to pay, it should charge this price, which we can call P*.

Summarize the pricing decision

In conclusion, a monopolist decides the price to charge for its profit-maximizing quantity of output (Q*) by determining the highest price the consumers are willing to pay for that quantity, as shown on the demand curve. The monopolist will then charge this price (P*) to maximize its profits.