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Monopoly and Profit Maximization

Among firms with market power, the simplest case to analyze is a pure monopoly.† In other cases Ė say, the oligoplistic market for batteries with several large producers Ė one firmís pricing behavior can cause another firmís demand curve to shift. In monopoly, there are, by definition, no other firms producing similar products and so we can treat the demand curve as fixed.

For this monopolist, we can think of total profit as being made up as the sum of the profits generated by each unit produced.† We can gage this profit by comparing its Marginal Revenue to its Marginal Cost. If its Marginal Revenue exceeds its Marginal Cost, producing the unit will add to total profit.

In the graph below, use the yellow button to experiment with different levels of output. Demonstrate that profit is maximized at the quantity where Marginal Revenue equals Marginal Cost. You should reason through the logic of this profit maximizing condition.

 

Created by Frank Levy and Myounggu Kang
Last Updated on September 26, 2003