Marginal Revenue Equals Marginal Cost Monopoly

Profit is maximized where marginal cost equals marginal revenue b.

Marginal revenue equals marginal cost monopoly. Marginal revenue is larger than marginal cost. Marginal revenue is the difference in total revenue at 3 units of output and at 4 units of output which is rs. The key difference with a perfectly competitive firm is that in the case of perfect competition marginal revenue is equal to price mr p while for a monopolist marginal revenue is not equal to the price because changes in quantity of output affect the price. Price equals marginal cost.

When marginal revenue is less than the marginal cost of production a company is producing too much and should decrease its quantity supplied until marginal revenue equals the marginal cost of. Marginal revenue is the additional revenue that a producer receives from selling one more unit of the good that he produces. In the above example marginal revenue was 5 and marginal cost was 3 so marginal revenue is larger than marginal costs. When the manager of a monopoly firm expands his output to 4 units price falls to rs.

The industry demand curve is also the firm s demand curve c. The profit maximizing quantity equates marginal revenue and marginal cost. Just like firms in other types of markets monopolies choose to produce each unit for which marginal revenue exceeds marginal cost. Normal profits are made only if average total cost equals average revenue d.

Because profit maximization happens at the quantity where marginal revenue equals marginal cost it s important not only to understand how to calculate marginal revenue but also how to represent it graphically. However expanding output from 4 to 5 would involve a marginal revenue of 400 and a marginal cost of 700 so that fifth unit would actually reduce profits. In figure 10 7b that quantity is 5000 units and the corresponding price is 1 50 which exceeds marginal cost. The same principle applies.

In this case we have made 2 variable profit which is profit which doesn t factor in fixed costs. 48 42 rs. 12 and total revenue is rs. For the firm with monopoly power price exceeds marginal cost.

Which of following is true of monopoly and not of perfect competition. Thus the monopoly can tell from the marginal revenue and marginal cost that of the choices given in the table the profit maximizing level of output is 4.