Exhibit 8-5 Demand and cost data for a monopolist Refer to Exhibit 8-5. The demand schedule and cost schedule for a monopolist are provided. Which output level maximizes profit?

Question

Exhibit 8-5  Demand and cost data for a monopolist  Refer to Exhibit 8-5. The demand schedule and cost schedule for a monopolist are provided. Which output level maximizes profit?

Quizplus · Accepted Answer

The profit maximizing output level is where marginal revenue equals marginal cost. In this case, the marginal revenue is found by calculating the change in total revenue from selling one more unit, which is not equal to the price of the good due to the monopolist's ability to control the market. Therefore, we can calculate marginal revenue as the change in total revenue divided by the change in quantity sold. 
Using this formula, we can find that the marginal revenue for output levels 1 - 7 are: 
1. $30
2. $25
3. $20
4. $15
5. $10
6. $5
7. -$1

We then compare these marginal revenue values to the marginal cost values provided in the cost schedule. The marginal cost for output levels 1-7 are all $10. 
The output level that maximizes profit is where marginal revenue equals marginal cost, which is at output level 4. At this output level, the monopolist can set a price of $25, resulting in a profit of $65 (total revenue of $100 minus total cost of $35). Therefore, the answer is C) 4.

Exhibit 8-5 Demand and Cost Data for a Monopolist Refer