Table 15-5
A monopolist faces the following demand curve:
-Refer to Table 15-5. The monopolist has total fixed costs of $60 and has a constant marginal cost of $15. What is the profit-maximizing level of production?
A)2 units
B)3 units
C)4 units
D)5 units

Question

Table 15-5
A monopolist faces the following demand curve: 
-Refer to Table 15-5. The monopolist has total fixed costs of $60 and has a constant marginal cost of $15. What is the profit-maximizing level of production?
A)2 units 
B)3 units 
C)4 units 
D)5 units

Quizplus · Accepted Answer

To find the profit-maximizing level of production, we need to find the quantity at which marginal revenue (MR) equals marginal cost (MC). From the demand curve, we know that when the monopolist produces 4 units, the price will be $32. At this quantity, the marginal revenue is $24, which we can calculate by subtracting the price of the 5th unit ($26) from the price of the 4th unit ($32). Since the constant marginal cost is $15, the monopolist will continue to produce until MR=MC=$15. This occurs at a quantity of 4 units. To confirm that this is the profit-maximizing level, we can calculate the total revenue and total cost at this quantity:

Total revenue = price x quantity = $32 x 4 = $128
Total cost = fixed cost + variable cost = $60 + ($15 x 4) = $120
Profit = total revenue - total cost = $128 - $120 = $8

If the monopolist were to produce a higher or lower quantity, their profit would be lower. Thus, the profit-maximizing level of production is 4 units.

Table 15-5 A Monopolist Faces the Following Demand Curve