P MC P D MR Q Q 2. (a) Draw a correctly labeled graph showing - ATC

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Presentation transcript:

P MC P D MR Q Q 2. (a) Draw a correctly labeled graph showing - ATC a typical monopoly that is maximizing profit and indicate each of the following. (i) Price (ii) Quantity of output (iii) Profit - P MC The quantity is determined where MR = MC. The price is determined above where MR = MC on the demand curve. The profit is A,P,B,C. P B ATC C A D MR Q Q

P D MR Q (b) Describe and explain the relationship between the monopolist’s demand curve and marginal revenue curve. P The MR curve slopes at a greater rate than the D curve because to sell more units, the monopolist must lower its price for each and every unit (or all units). D MR Q

D MR Q (b) Describe and explain the relationship between the monopolist’s demand curve and marginal revenue curve. Let’s say that at a price of $24, two units will be purchased and at a price of $23, three units will be purchased. $24 $23 $21 D MR Q MR 2 3 P x Q = TR $24 x 2 = $48 $23 x 3 = $69 The additional revenue from lowering the price means that the MR is less than the price or demand. $21

MC P D MR Q Q (c) Label each of the following on your graph in part (a). (i) Consumer surplus (ii) Deadweight loss The area of P,A,B is the consumer surplus. A MC P B The area of deadweight loss is D, B, C. C D D MR Q Q