Chapter 8

B- Pure Monopoly

Profit Maximization
Characteristics of Pure Monopoly
1- One seller
2-One Item
3-Share in the market = 100%
The market demand is the demand faced by the
monopolist
4-Price is not constant: P > MR
5-Price-Maker . Monopolist has power over the price
limited by market demand
6-No Entry or Exit by other sellers
 Pricing and Output Decisions in Monopoly
Markets
• A monopoly market consists of one firm (the
firm is the market)

– The firm has the power to set the price which

maximizes profit.

– The profit maximizing price is limited by the

demand curve for the product, and in particular,
the price elasticity of demand.
 P > MR
P Q TR MR
11 6 66 --
10 7 70 4
9 8 72 2
8 9 72 0
710 70 -2

MR = MP x P (MRP of labor)
MR = 0 if MP = 0
MR < 0 if MP < 0
 Example
Given the market demand faced by a monopolist
(P and Q) and given is TC

Q P TR MR TC MC Profits
0 20 0 ---- 20 --- -- 20
1 18 18 18 24 4 -- 6
2 16 32 14 27 3 5
3 14 42 10 29 2 13
4 12 48 6 35 6 13
5 10 50 2 45 10 5
6 8 48 --2 59 14 -- 11
7 6 42 --6 77 18 -- 25
a-In what kind of market is this firm functioning?
Price is not constant. Imperfect
competition(Monopoly)
b-Calculate optimum Q?
MR = MC = 6 at Q = 4 units
c-Calculate price that the firm must charge?
P =12 at Q = 4
d-Calculate profits?
Profits = TR – TC = 48 – 35 = 13
 Pricing and Output Decisions
in Monopoly Markets
Demand is downward
sloping because the
firm is a price-maker

Assume MC is constant
and choose output
where MR=MC, set
price at P*
 Pricing and Output Decisions
in Monopoly Markets

How to calculate optimum

Q?
Set output where MR=MC
Q = 6 at P = 120 & ATC=90
TR = OABQ = 720
TC = OCDQ = 540
Profits = CABD = 180
 Problem 1
A monopolist has demand and cost curves given by:
 Qd = 1000 - 2P
TC = 5,000 + 50Q
a. Find the monopolist's profit-maximizing quantity and price.
b.Find the monopolist's profit.
Answer:
a. TR = P x Q
2P = 1000 – Q , P = 500 – Q/2 , TR = 500Q – Q2/2
MR = 500 - 2Q/2 , MR = 500 -- Q
MC = 50
50 = 500 -- Q
Q* = 450
P* = 500 – 450/2 = 275
b.Profits = TR – TC
TR = 275 x 450 & TC = 5,000 + (50 X 450)
TR = 123750 & TC = 27500 and profits = 96250
 Problem 2

Given the following figures on a business operating

under the conditions of pure Monopoly:
P = 10, Q = 4, MR = 7, TC= 28, TFC = 10,MC = 7
What advice do you give this business? Why?
MR = MC so the business is at optimum Q
TR = 10 x 4 = 40
TC = 28
Operate to maximize profits = 12
 Problem 3

A monopolist has demand and cost curves given by:

Qd = 10,000 - 20P
TC = 1,000 + 10Q +0 .05Q2
 a. Find the monopolist's profit-maximizing quantity and price.
b.Find the monopolist's profit.
Answer:
a. 20 P = 10000 – Qd
P = 500 – Qd/20 and TR = 500Q – Q2/20 and TR = 500Q – Q/10
MR = 500 - 0.1 Q
MC = 10 + 0.1Q
10 + 0.1Q = 500 - 0.1 Q so 0.2Q = 490
Q* = 2,450
P* = $377.50
b. TR = (377.50) x 2450 = 924875
TC = 1,000 + 10 x 2450 + 0.05(2450)2 = 325625
Profits = 599,250