# Monopoly single-price: Price & output decisions

### Monopoly single-price: Price & output decisions

#### Lessons

The monopoly sets their output and price at a point in which it maximizes economic profit. There are two ways to do this:

Maximizing Profit with Total Revenue & Total Cost

Suppose we know the demand for the product, and the total cost of producing them. Then we can:
1. Draw a table with the following columns: quantity, price, total revenue, total cost and profit.
2. Calculate the total revenue ( p × q ).
3. Calculate the profit (P = R - C ).
4. Find the output with the highest attainable profit.

 Price (p) Quantity demanded (q) Total Revenue ( R = p × q ) Total Cost (C) Profit (P = R - C) 10 0 0 5 -5 9 1 9 7 2 8 2 16 10 6 7 3 21 14 7 6 4 24 19 5 5 5 25 25 0

In this case, the highest attainable profit when the output produced is 3, the price is \$7.

If we graph total revenue and total cost in a graph, then the highest attainable profit will be the output in which TR and TC have the biggest gap.

Maximizing Profit with MR = MC

Just like in perfect competition, monopolist find the output q and price p that maximizes profit by solving for MR = MC.

To solve p and q graphically, we do the following:
1. Graph the MR, MC, ATC, and demand Curve
2. Find the intersection point of MR and MC to find output q
3. Use output q to find price p on the demand curve.

To solve p and q graphically, we do the following:
1. Define formulas for demand curve, MR and MC
2. Set MR = MC and solve for output q
3. Put output q into the demand formula and solve for p

To calculate economic profit, we find the average total cost ATC at the output q, and use the formula

Economic Profit = (p - ATC) q

Unlike perfect competition, monopolist is inefficient because it creates deadweight loss.

Monopolist produces the output that maximizes profit, but there is a shortage because consumers want more of the product.

Note 1: The deadweight loss and consumer surplus can be calculated by using the area of the triangle formula
A = $\large \frac{bh}{2}$

Note 2: The producer surplus can be calculated by breaking apart the surplus into a triangle and square. Then calculate the areas of each to find the sum.
• Introduction
Monopoly Single-Price: Price & Output Decisions Overview:
a)
Maximizing Profit with Total Revenue & Total Cost
• Use a Table to Keep Track of Information
• Calculate Total Revenue & Cost
• Calculate Profit
• Find the One with the Highest Profit

b)
Maximizing Profit with MR = MC
• Graphically: Graph MR, MC, ATC and Demand
• Find the intersection of MR and MC
• Algebraically: Find equations and set MR = MC
• Solve and find q and p
• Find the Economic profit

c)