UNIVERSITI TUNKU ABDUL RAHMAN FACULTY OF BUSINESS AND FINANCE Tutorial 12 (Topic 10) 1.

The graph below shows a firm's demand, marginal revenue, and marginal cost curves. Find the profit-maximizing level of output and mark it q*. Find the price the firm should charge and mark it P*. P MC

D Quantity MR 2. Graphically illustrate the profit-maximizing level of output of the monopolists. Shade the area of profit.

3.

Henry has a local monopoly in the sale of piatas. The table below shows the demand for piatas at various prices. The total cost of production of the various levels of output is also shown. Calculate marginal revenue and marginal cost for the firm. What level of output maximizes profit? What price should the firm charge? Total Cost $10 13 17 22 28 35

Quantity 0 1 2 3 4 5

Price $15 13 11 9 7 5

Quantity 0 1 2 3 4 5

4. A monopoly firm is producing where its marginal revenue is equal to marginal cost. At this level of output, the firm's price is $3.75 and its average total cost is $4.50. Is the firm earning a profit? Explain. How could this firm determine whether it should continue to operate in the short run or if it should shut down?

5. Use a graph to illustrate why monopoly leads to an inefficient mix of output.

6. Suppose that a certain manufacturer has a monopoly on Eternity ring business (a constant cost industry). (a) Using demand and cost curves, draw a diagram depicting the firms profit-maximizing price and output level. (b) On your diagram, show the deadweight loss that occurs because the output level is determined by a monopoly rather than by a competitive market. Explain.