A profit-maximizing monopoly will produce an output level of a. Q1. b. Q2. c. Q3. d. Q4. ANS: DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Profit maximization MSC: Analytical 17. Refer to Figure 15-5. A profit-maximizing monopoly will charge a price of a. P5. b. P4. c. P3. d. P2. ANS: DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Profit maximization MSC: Analytical 18. Refer to Figure 15-5. A profit-maximizing monopoly’s total revenue is equal to a. P4 x Q3. b. P5 x Q1. c. P3 x Q4. d. (P4-P2) x Q3. ANS: DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Total revenue MSC: Analytical 19. Refer to Figure 15-5. A profit-maximizing monopoly’s total cost is equal to a. P4 x Q3. b. P2 x Q3. c. P1 x Q3. d. (P4-P1) x Q3. ANS: DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Total cost MSC: Analytical 20. Refer to Figure 15-5. A profit-maximizing monopoly’s profit is equal to a. P4 x Q3. b. (P4-P2) x Q3. c. (P4-P1) x Q3.
The Correct Answer and Explanation is :
To answer these questions, we will analyze a profit-maximizing monopoly’s behavior using economic principles.
Answers:
- Question 16: A profit-maximizing monopoly will produce an output level of:
Answer: Q3. - Question 17: A profit-maximizing monopoly will charge a price of:
Answer: P4. - Question 18: A profit-maximizing monopoly’s total revenue is equal to:
Answer: P4 × Q3. - Question 19: A profit-maximizing monopoly’s total cost is equal to:
Answer: P2 × Q3. - Question 20: A profit-maximizing monopoly’s profit is equal to:
Answer: (P4 − P2) × Q3.
Explanation (300 words):
A monopoly maximizes its profit by producing at the output level where marginal cost (MC) equals marginal revenue (MR). Unlike a perfectly competitive firm, a monopoly has pricing power, meaning it can set the price by choosing a specific output level. However, the price is determined based on the demand curve for its product.
Question 16:
The monopoly will choose Q3, where MR = MC, as this is the profit-maximizing quantity. Producing less or more than this quantity would result in lower profits.
Question 17:
The corresponding price the monopoly charges is found by looking at the demand curve at quantity Q3. This price is P4, which consumers are willing to pay for Q3 units.
Question 18:
Total revenue is calculated as price multiplied by quantity. At Q3 and price P4, the total revenue is:
[
\text{Total Revenue} = P4 × Q3.
]
Question 19:
The total cost is determined by the average total cost (ATC) curve. At the profit-maximizing output Q3, the cost per unit is P2. Thus, the total cost is:
[
\text{Total Cost} = P2 × Q3.
]
Question 20:
Profit is the difference between total revenue and total cost. At Q3, the profit is:
[
\text{Profit} = (\text{Price} – \text{ATC}) × \text{Quantity} = (P4 − P2) × Q3.
]
This approach allows the monopoly to maximize profit by balancing revenue and costs effectively.