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Homework answers / question archive / A nondiscriminating monopolist faces a downward sloping demand curve and faces increasing costs of production
A nondiscriminating monopolist faces a downward sloping demand curve and faces increasing costs of production. At price P1, the monopolist sells Q1 units of output. At price P2, the monopolist sells Q2 units of output. At both prices, the monopolist produces the same amount of revenue. Determine if the following statement is either True or False. If the monopolist maximizes profit, then it is indifferent between offering the good at either price, since at either price it produces the same amount of revenue.
Answer.......... False.
Explanation:- The monopolist wants to maximize profit ( TR —TC) . The monopolist's per unit cost increases with increase in output, as it faces increasing cost, so at higher level of output ,although the firm earns the same total revenue but total cost will increase which will decrease the profit of the monopolist. So the monopolist will maximize profit at P1, and he will not be indifferent in offering quantity at P1 and P2.
( Example — Suppose monopolist offers 20 unit at price 5 , so TR=P.Q =100 let TC =20×2=40 , so profit = 100—40= 60
At price P2 ( 2.5) it sells 40 units, TR =100 , TC = 40×2.25=90 ( average cost increases with increase in output) Profit =100—90=10
So , here profit decreased , the monopolist will not be indifferent in offering 20 units and 40 units. )
