Answer to Question #82711 in Microeconomics for Emily Jeffords

Question

Draw the graph for a monopoly with demand, marginal revenue, and marginal cost curves. Identify the profit-maximizing output level (Qm) and price (Pm). (Photos of your work are not accepted)

Suppose the monopolist sells Qm units of output at the regular price and then puts the product on sale at a lower price, Ps. Show the new price and quantity. What happens to the firm’s profits? Does price discrimination lead to a more efficient or less efficient outcome? Why or why not?

Answer 1

Demand and marginal revenue for a monopoly are different downward-sloping curves, and marginal cost curve is the same as for a competitive firm. The profit-maximizing output level (Qm) is at the intersection of MC and MR curves (MR = MC) and price (Pm) can be found from the demand curve at this quantity (Qm).

If the monopolist sells Qm units of output at the regular price and then puts the product on sale at a lower price, Ps, then the new equilibrium quantity will be higher. The firm’s profits will decrease, as it is not profit-maximizing output. The price discrimination can lead to a more efficient outcome, if it is perfect price discrimination.