A monopolist finds out that if it expands output from 13 to 14 units, it will have to lower its...
Question:
A monopolist finds out that if it expands output from 13 to 14 units, it will have to lower its price from $25 to $20.
a. Calculate the monopolist's marginal revenue of producing the 14th unit.
b. If the marginal cost of producing the additional good is positive, should this monopolist produce the 14th unit?
Marginal Analysis:
The marginal analysis or the incremental analysis is useful for making short-run decision making where at least one input resource is fixed while the other input resources are varying. Under the marginal analysis, a forward-looking approach is followed and hence only incremental costs and incremental revenues are considered.
Answer and Explanation: 1
Answer to a
The total revenue when 13 units are sold is given by:
- = Selling price per unit * number of units sold
- = $25 * 13
- = $325
The total revenue when 14 units are sold is given by:
- = Selling price per unit * number of units sold
- = $20 * 14
- = $280
The monopolist's marginal revenue of producing the 14th unit is given by:
- = Total revenue when 14 units are sold - total revenue when 13 units are sold
- = $325 - $280
- = -$45
Answer to b
The monopolist should not produce the 14th unit because the marginal revenue for the 14th unit is negative while the marginal cost for the 14th unit is positive which in turn will lead to marginal loss.
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