Monopolist Maximizes Profit

How a Monopolist Maximizes Profit

Introduction

A firm should produce at the point where it is at its economic efficiency. This where the firm will be gaining maximum returns from the optimum utilization of resources (Arnold, 2010, p.241). It may be a perfect competition or imperfect such as monopoly, monopolistic, or oligopoly. The profit is said to be at its maximum when marginal revue is equal to marginal revenue. This will cause the market to be efficient in production and achieving its optimal point. This research is done in order to understand this phenomenon more in depth.

Discussion

Profit Maximization

The level where monopolist maximizes their profit is when marginal revenue equated to marginal cost (Taylor & Wareepana 2007, p.165). Although it is commonly known that cost should be lower than the revenue earned to attain the profit. This is what the research will be about. What if the marginal costs are lower than marginal revenue? Wouldn't this be more profitable?

Resarch Question

Will Marginal Cost lower than Marginal Revenue point be more profitable than Marginal Revenue equal to Marginal Cost?

Should the Monopolist aim for Profit maximization or Revenue maximization?

What if Marginal revenue is greater than Marginal cost?

The chart below shows the condition of a monopolist firm;

output

Price ($)

Total revenue ($)

Marginal revenue ($)

Total cost ($)

Average cost ($)

Marginal cost ($)

Profit ($)

0

14

-

-

2

-

-

N.A

1

12

12

12

6

6

4

6

2

10

20

8

8

4

2

12

3

8

24

2

12

4

4

12

4

6

24

0

20

5

8

4

5

4

25

-4

35

7

15

-15

As the above chart shows, at output 1, Marginal revenue is $12 which is greater than marginal cost that is $6. But by looking at the chart it is clear that if we increase output to 2 there will be an addition to the revenue as the profit will increase by $6. Here the marginal revenue is decreasing from $12 to $8 but as the productivity increase marginal cost decreased from $4 to $2. Reduction in marginal cost and marginal revenue with an increase in production is giving a better profit.

As we move to output 3, Marginal revenue is $4 and Marginal cost is $4. At this point the profit is same as output 2 that is $12. The marginal revenue has dropped down from $8 to $4 and marginal cost has increased from $2 to $4. This means revenue is going down and cost are coming up still this is the profit maximization point. It could have been output 2 where the revenues are greater than cost and earning the same profit. Even the average cost is about the same.

However, total revenue is greater in output ...