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The monopolist has total fixed costs of $60 and has a constant marginal cost of $15
The monopolist has total fixed costs of $60 and has a constant marginal cost of $15. What is the profit-maximizing level of production?
Expert Solution
The demand curve facing the monopolist is given below:
| Price | Quantity |
|---|---|
| $51 | 1 |
| $47 | 2 |
| $42 | 3 |
| $36 | 4 |
| $29 | 5 |
| $21 | 6 |
| $12 | 7 |
We first compute the total revenue and marginal revenue at different level of production:
| Price | Quantity | Total revenue | Marginal revenue |
|---|---|---|---|
| $51 | 1 | $51 | - |
| $47 | 2 | $94 | $43 |
| $42 | 3 | $126 | $32 |
| $36 | 4 | $144 | $18 |
| $29 | 5 | $145 | $1 |
| $21 | 6 | $126 | -$19 |
| $12 | 7 | $84 | -$42 |
The monopolist will produce until marginal revenue is not lower than the marginal cost. At Q = 4, the marginal revenue is $18, which is higher than the marginal cost of $15. At Q = 5, the marginal revenue is $1, which is lower than the marginal cost. Thus the profit-maximizing level of production is Q = 4.
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