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Short Run Price and Output Determination

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Starting from Figure 8-6 showing the short-run price and output determination by the monopolist, suppose that the average fixed costs of the monopolist increase by $5 and that its AVC is $6 less than the new ATC at the best level of output. Show the best level of output and price, the amount of profit or loss per unit and in total, and whether it pays for the monopolist to produce.

** ATC=AFC+AVC. After AFC increases by $5, ATC will increase by
$5 (ATC curve moves up vertically by $5 for every output Q) and
MC, D and MR stay the same. The AFC for 500 units is $6, in other
words, the TFC is $3,000. You do not need to submit the figure.

Figure 8-6 Short-Run Price and Output Determination by a Monopolist - The best level of output for the monopolist in the short run is 500 units and is given by point E, where MR = MC. At Q = 500, P = $11 (point A on the D curve), and ATC = $8 (point F), so that the monopolist earns a profit of AF = $3 per unit and AFBC = $1,500 in total.

Please help! I do not understand any of this at all.

I have attached the figure!

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Solution Summary

Short Run Price and Output Determination are discussed.

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Let us first discuss initial graph

A monopolist sets its output level such that MR=MC to maximize its profit.
Now refer to graph and check where MR and MC curve intersects each other. We find that MR and MC curve intersects each other at point E. At point E, output level is 500 units. So, profit maximizing output is 500 units.

Now we have to find what price is offered at this output level. A vertical line from point E intersects demand curve (D) at point A. We find that ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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