Answer to Question #49285 in Microeconomics for Bradly

Question

1) Suppose that at 100 units of output a monopolist is producing such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $8 per unit and is incurring average variable costs of $5 per unit and average fixed costs of $4 per unit. On the basis of this information we can conclude that the firm is:



operating at maximum profit by producing the 100 units of output


operating at a loss that could be reduced by shutting down


operating at a profit that could be increased by producing more output


operating at a loss that is less than the loss incurred by shutting down

2) Suppose a firm has monopoly power in the production of a particular good. If it finds that revenue and cost conditions are such that at all levels of output the price it can charge in order to sell all of the units is less than the average variable costs then it is in the firm’s best interest to:



close down because its operating losses will exceed its shut-down losses at all levels of output


maximize profits by producing where MR = MC


close down because its total operating cost will exceed its total revenue


minimize losses by producing where MR = MC

Answer 1

1) Suppose that at 100 units of output a monopolist is producing such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $8 per unit and is incurring average variable costs of $5 per unit and average fixed costs of $4 per unit. On the basis of this information we can conclude that the firm is:
d) operating at a loss that is less than the loss incurred by shutting down

2) Suppose a firm has monopoly power in the production of a particular good. If it finds that revenue and cost conditions are such that at all levels of output the price it can charge in order to sell all of the units is less than the average variable costs then it is in the firm’s best interest to:
a) close down because its operating losses will exceed its shut-down losses at all levels of output