Answer to Question #165583 in Microeconomics for aksheeta

Question

Using marginal revenue and marginal cost curves under monopoly show the output levels that maximize a) total revenue b) total profits respectively. Are these two output levels equal? Explain why or why not? 

Answer 1

a). For a monopoly, the total revenue is maximized at the point where MR=0.

b). The profit for a monopoly is maximized at the point where MR=MC.

From the figure above, profit is maximized at point E, where the marginal revenue intersects with the marginal cost. At this point, the firm produces Qm units and charges a price equal to Pm.

To maximize total revenue, the firm produces at the point where MR=0 and produces Q* units of output.

Clearly, we can see that the two outputs are not equal. This is because a monopoly maximizes its total revenue at the point where the demand is unit elastic.