The figure given below represents a monopoly firm producing perfume with downward sloping demand and marginal revenue (MR) curves.The products of this firm are sold in the competitive market by a retailer.Among the horizontal lines in the figure:
A - represents the marginal cost of per unit perfume production
B - represents the marginal cost of an independent perfume retailer
C - represents the sum of A and B
D - represents the marginal cost of the perfume monopolist for retailing its own output
E - represents the sum of A and D.

-Refer to Figure .Determine the profit earned by the perfume monopolist if it chooses to hire a retailer for selling its product.
A)$2.7
B)$6.5
C)$5.5
D)$2.4

Question

The figure given below represents a monopoly firm producing perfume with downward sloping demand and marginal revenue (MR) curves.The products of this firm are sold in the competitive market by a retailer.Among the horizontal lines in the figure:
A - represents the marginal cost of per unit perfume production
B - represents the marginal cost of an independent perfume retailer
C - represents the sum of A and B
D - represents the marginal cost of the perfume monopolist for retailing its own output
E - represents the sum of A and D.

-Refer to Figure .Determine the profit earned by the perfume monopolist if it chooses to hire a retailer for selling its product.
A)$2.7 
B)$6.5 
C)$5.5 
D)$2.4

Quizplus · Accepted Answer

To determine the profit earned by the perfume monopolist if it chooses to hire a retailer for selling its product, we need to find the output level where MR=MC. From the diagram, this occurs at an output level of 8 units of perfume. At this output level, the monopolist sells the perfume to the retailer at a price of $5.5 per unit (point E).

The monopolist's marginal cost of production is given by line A, which intersects the MR curve at an output level of 6 units. Therefore, the marginal cost of each unit produced is $2.7 (point A).

The monopolist hires the retailer to sell the perfume, so it incurs an additional cost equal to the retailer's marginal cost of $2.8 (point B). So, the total cost of producing and selling each unit of perfume is $5.5 ($2.7 + $2.8).

The monopolist's revenue per unit sold is $5.5 (point E). Therefore, the monopolist's profit per unit sold is $0, because total revenue ($5.5) equals total cost ($5.5).

Therefore, the profit earned by the perfume monopolist if it chooses to hire a retailer for selling its product is $0 per unit. For 8 units of output, the total profit earned is $0 x 8 = $0.

The Figure Given Below Represents a Monopoly Firm Producing Perfume