Consider the following demand and cost information ?

$\begin{array}{|c|c|c|}
\hline \underline{\text { Quantity }} & \underline{\text { Price }} & \underline{\text { Total Cost }} \
\hline 0 & € 40 & € 10 \
\hline 1 & € 30 & € 15 \
\hline 2 & € 20 & € 25 \
\hline 3 & € 10 & € 40 \
\hline 4 & € 0 & € 60 \
\hline
\end{array}$
Refer to the table above. To maximize profit, the monopolist sets the price at
?
A) €40
B) €20
C) €0
D) €10

Question

Consider the following demand and cost information ?

$\begin{array}{|c|c|c|}
\hline \underline{\text { Quantity }} & \underline{\text { Price }} & \underline{\text { Total Cost }} \
\hline 0 & € 40 & € 10 \
\hline 1 & € 30 & € 15 \
\hline 2 & € 20 & € 25 \
\hline 3 & € 10 & € 40 \
\hline 4 & € 0 & € 60 \
\hline
\end{array}$
Refer to the table above. To maximize profit, the monopolist sets the price at
?
A) €40
B) €20
C) €0
D) €10

Quizplus · Accepted Answer

To maximize profit, the monopolist should set the price where marginal revenue (MR) equals marginal cost (MC). Using the information from the table, we can calculate that the MR for each quantity is as follows:

MR(0) = 40 - 0 = 40
MR(1) = 30 - 40 = -10
MR(2) = 20 - 30 = -10
MR(3) = 10 - 20 = -10
MR(4) = 0 - 10 = -10

We can see that MR decreases as quantity increases, which is typical for a monopolist. Now we need to find where MC equals the price that maximizes profit. We can calculate that the MC for each quantity is as follows:

MC(0) = 10
MC(1) = 5
MC(2) = 10
MC(3) = 15
MC(4) = 20

We can see that MC increases as quantity increases, which is typical for a firm in the short run. The point where MC equals the price that maximizes profit is where MR = MC and where MC is increasing. This occurs at a quantity of 2, where the price is €20. Therefore, the best choice for the monopolist to set the price is €20.

Consider the Following Demand and Cost Information Refer to the Table Above