15-3ProfMax - A Model of Monopoly Monopoly Profit...

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1 Monopoly Profit Maximization Chapter 15-3 A Model of Monopoly ± How much should the monopolistic firm choose to produce if it wants to maximize profit? The Monopolist’s Price and Output Numerically ± The first thing to remember is that marginal revenue is the change in total revenue that occurs as a firm changes its output. TR=P x Q TR=P x Q MR = Change in Total Revenue/ change in output MR = Change in Total Revenue/ change in output Another way to say it is: Another way to say it is: “how much does your Total Revenue changes as you increase output how much does your Total Revenue changes as you increase output The Monopolist’s Price and Output Numerically ± When a monopolist increases output, it lowers the price on all previous units. ± As a result, a monopolist’s marginal revenue is always below its price. The Monopolist’s Price and Output Numerically ± In order to maximize profit, a monopolist produces the output level at which marginal cost equals marginal revenue. ± Producing at an output level where MR > MC or where MR < MC will yield lower profits. Profit Maximizing Level of Output ± Marginal revenue (MR) is the change in total revenue associated with a change in quantity • The monopoly maximizes profit when marginal revenue equals marginal cost • The goal of the monopolistic firm is to maximize profits, the difference between total revenue and total cost Marginal cost (MC) is the change in total cost associated with a change in quantity 15-6
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15-3ProfMax - A Model of Monopoly Monopoly Profit...

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