Table 17-4
The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline.
-Refer to Table 17-4. If the market for gasoline in Mauston is a monopoly, then the profit-maximizing monopolist will charge a price of
A)$7 and sell 150 gallons.
B)$5 and sell 250 gallons.
C)$3 and sell 350 gallons.
D)$0 and sell 500 gallons.

Question

Table 17-4
The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline. 
-Refer to Table 17-4. If the market for gasoline in Mauston is a monopoly, then the profit-maximizing monopolist will charge a price of
A)$7 and sell 150 gallons. 
B)$5 and sell 250 gallons. 
C)$3 and sell 350 gallons. 
D)$0 and sell 500 gallons.

Quizplus · Accepted Answer

A monopoly maximizes profit where marginal revenue (MR) equals marginal cost (MC), and then charges the price corresponding to the quantity demanded at that price. To find the monopolist's profit-maximizing price and quantity, we need to calculate the monopolist's marginal revenue and marginal cost at each level of output.

The monopolist's marginal revenue is the change in total revenue from selling one more unit of gasoline. In a monopoly, the marginal revenue is less than the price, so we can find the marginal revenue at each level of output by dividing the change in total revenue by the change in quantity.

For example, to find MR at a price of $3, we look at the change in total revenue from selling 350 gallons versus 400 gallons:
MR at $3 = (Total revenue from selling 350 gallons - Total revenue from selling 400 gallons) / (350 - 400) = ($1050 - $1200) / (-50) = $3.

The monopolist's marginal cost is zero, since the seller incurs no costs in selling gasoline.

Using this information, we can create a table of the monopoly's marginal revenue and marginal cost:

| Price | Quantity Demanded | Total Revenue | Marginal Revenue | Marginal Cost |
|-------|------------------|---------------|-----------------|---------------|
| $7    | 0                | $0            | -               | $0            |
| $6    | 50               | $300          | $6              | $0            |
| $5    | 100              | $500          | $5              | $0            |
| $4    | 150              | $600          | $4              | $0            |
| $3    | 200              | $600          | $3              | $0            |
| $2    | 250              | $500          | $2              | $0            |
| $1    | 300              | $300          | $1              | $0            |
| $0    | 500              | $0            | $0              | $0            |

The monopolist will maximize profit where MR=MC, which happens at a quantity of 250 gallons. At that quantity, the marginal revenue is $2 and the marginal cost is $0. Therefore, the monopolist will charge the highest price that people are willing to pay for 250 gallons, which is $5. Therefore, the profit-maximizing monopolist will charge a price of $5 and sell 250 gallons.

Table 17-4 the Table Shows the Town of Mauston's Demand Schedule for Schedule