# 9.2 How a profit-maximizing monopoly chooses output and price  (Page 3/24)

 Page 3 / 24

To calculate total revenue for a monopolist, start with the demand curve perceived by the monopolist. [link] shows quantities along the demand curve and the price at each quantity demanded, and then calculates total revenue by multiplying price times quantity at each level of output. (In this example, the output is given as 1, 2, 3, 4, and so on, for the sake of simplicity. If you prefer a dash of greater realism, you can imagine that these output levels and the corresponding prices are measured per 1,000 or 10,000 pills.) As the figure illustrates, total revenue for a monopolist rises, flattens out, and then falls. In this example, total revenue is highest at a quantity of 6 or 7.

Clearly, the total revenue for a monopolist is not a straight upward-sloping line, in the way that total revenue was for a perfectly competitive firm. The different total revenue pattern for a monopolist occurs because the quantity that a monopolist chooses to produce affects the market price, which was not true for a perfectly competitive firm. If the monopolist charges a very high price, then quantity demanded drops, and so total revenue is very low. If the monopolist charges a very low price, then, even if quantity demanded is very high, total revenue will not add up to much. At some intermediate level, total revenue will be highest.

However, the monopolist is not seeking to maximize revenue, but instead to earn the highest possible profit. Profits are calculated in the final row of the table. In the HealthPill example in [link] , the highest profit will occur at the quantity where total revenue is the farthest above total cost. Of the choices given in the table, the highest profits occur at an output of 4, where profit is 800.

## Marginal revenue and marginal cost for a monopolist

In the real world, a monopolist often does not have enough information to analyze its entire total revenues or total costs curves; after all, the firm does not know exactly what would happen if it were to alter production dramatically. But a monopolist often has fairly reliable information about how changing output by small or moderate amounts will affect its marginal revenues and marginal costs, because it has had experience with such changes over time and because modest changes are easier to extrapolate from current experience. A monopolist can use information on marginal revenue    and marginal cost    to seek out the profit-maximizing combination of quantity and price.

The first four columns of [link] use the numbers on total cost from the HealthPill example in the previous exhibit and calculate marginal cost and average cost. This monopoly faces a typical upward-sloping marginal cost curve, as shown in [link] . The second four columns of [link] use the total revenue information from the previous exhibit and calculate marginal revenue.

Notice that marginal revenue is zero at a quantity of 7, and turns negative at quantities higher than 7. It may seem counterintuitive that marginal revenue could ever be zero or negative: after all, does an increase in quantity sold not always mean more revenue? For a perfect competitor, each additional unit sold brought a positive marginal revenue, because marginal revenue was equal to the given market price. But a monopolist can sell a larger quantity and see a decline in total revenue . When a monopolist increases sales by one unit, it gains some marginal revenue from selling that extra unit, but also loses some marginal revenue because every other unit must now be sold at a lower price. As the quantity sold becomes higher, the drop in price affects a greater quantity of sales, eventually causing a situation where more sales cause marginal revenue to be negative.

another definition of economic s
what is economic s
Louisa
is the study of the individual interest
Tut
or the study of the scarcity
Tut
what is optimal biomass
biological approach in economics
Sheikh
What is the difference between pure monopoly and natural monopoly
what is price elasticity demand
Alex
Explain the law of demand
Manoj
hello my name is Godwin David am an economics student
Bah
what is the demand and supply of QD is equal to 4040 thousand
uses and limitations of elasticity of demand concept
Tinodaishe
Elasticity of demand refers to the degree of responsiveness of quantities
Thanks
Ogbonna
Hi everyone
Ogbonna
I need all the formula for elasticity of demand
%∆QD/%∆P formula for elasticity of demand
divine
for that of income elasticity %∆QD / %∆I
divine
and that of cross elasticity of demand %∆QDx / %∆Py
divine
economics is a science which studies human behavior and it's alternative uses as means and scarce resources
given that following demand and supply equation
factors affecting demand and supply
consumer's chioce price substitute effect quality of product
Arsh
Why is economics study as a human
what is economics
Bakarr
hello How are you doing
Sanni
Economics is a social science that studies human behavior as a relationship between ends and scarce means which has alternative uses.
IBITOYE
Mary
Mary
different between demand and supply
importance of demand
Khalfan
what is the demand and supply of Qd=40,000-6P Qs=14P-28,000 the equilibrium price
3400
Ram
pls, show workings
Olowe
yes work
Collins
what is economics by Adams smith
Francis
to earn wealth more and more
Ram
An inquiry to nature and causes of wealth to the nature
IBITOYE

#### Get Jobilize Job Search Mobile App in your pocket Now! By By By Michael Sag By OpenStax By Rachel Carlisle By OpenStax By Janet Forrester By OpenStax By OpenStax By OpenStax By By Richley Crapo