Price And Quantity Determination Under Monopoly - SS2 Economics Lesson Note

Under a monopoly, there is only one seller in the market, and they have the power to set the price and quantity of the product or service they are offering. In order to maximize their profits, a monopoly will choose to produce the quantity of goods where the marginal cost equals marginal revenue.

The marginal cost is the additional cost incurred to produce one more unit of the product, while the marginal revenue is the additional revenue earned by selling one more unit of the product. A monopoly will produce and sell the quantity of goods where the marginal cost equals the marginal revenue, as this is the point where the company's profits are maximized.

Once the quantity has been determined, the monopoly will set the price by finding the point on the demand curve where that quantity intersects. This is the price that consumers are willing to pay for that quantity of goods, and it is also the highest price that the monopoly can charge while still selling that quantity of goods.

As a result, under a monopoly, the price of the product or service is generally higher than it would be under perfect competition, and the quantity produced is generally lower. This can lead to inefficiencies in the market and a reduction in overall economic welfare.

 

Word problems on determination of equilibrium price and quantity understand Monopoly

Example  1:

A monopoly's marginal cost equation is MC = 4Q, and its marginal revenue equation is MR = 60 - 2Q. What quantity of goods will the monopoly produce, and what price will it charge?

Solution:

To determine the quantity of goods the monopoly will produce, we need to set MC equal to MR:

4Q = 60 - 2Q

Solving for Q, we get:

6Q = 60

Q = 10

To determine the price, we need to substitute the quantity back into the MR equation:

MR = 60 - 2Q

MR = 60 - 2(10)

MR = 40

Thus, the monopoly will charge a price of $40 per unit and produce 10 units of goods. 

 

Example  2:

A monopoly's marginal cost equation is MC = 2Q, and its marginal revenue equation is MR = 20 - Q. What quantity of goods will the monopoly produce, and what price will it charge?

Solution:

We need to set MC equal to MR to determine the quantity of goods the monopoly will produce:

2Q = 20 - Q

Solving for Q, we get:

3Q = 20

Q = 6.67 

To determine the price, we need to substitute the quantity back into the MR equation:

MR = 20 - Q

MR = 20 - 6.67

MR = 13.33

Thus, the monopoly will charge a price of $13.33 per unit and produce 6.67 units of goods.