Monopoly profit revisited, bringing in Average Cost

A pure monopoly is a firm that produces a product for which there are no close substitutes. Whether the source of the monopoly's unique status is the result of patents, control of a resource, or economies of scale, the monopoly essentially is the industry. The demand for its product is the same as the industry demand, and as such, is downward sloping. To sell additional output, the firm must lower the price. Further, if it cannot discriminate, this lower price applies to all units sold, not just the marginal unit. Marginal revenue must then be less than the price. A monopolist searches the demand curve for the price and quantity that maximizes its profits.

Exploration: What is the profit-maximizing price and quantity for a non-discriminating pure monopolist?

The graph shows the demand, marginal revenue, and cost data for a non-discriminating pure monopolist. It is currently producing 60 units per month and charging a price of $250 each. Its total revenue, cost, and profit are shown in the box. To use the graph, click and drag the magenta triangle to change the firm's choice of output. Click on the Show Profit/Loss for a graphical illustration of the profit or loss at the chosen output. Dragging up or down on the D label will change the elasticity of the demand curve; click Reset to restore all initial settings.

1. Starting from the initial price and quantity, what happens to the firm's revenue as the firm lowers the price? What combination of quantity and price will maximize the firm's revenue? Note the value of marginal revenue over this range.
   
   
2. What quantity and price will maximize the firm's profits? How much profit is attainable at this choice? Compare marginal revenue and marginal cost at alternative choices.
   
   
3. Experiment on your own with different demand conditions. For a given demand curve, what rule for selecting price and output will always provide the firm with the greatest profits?

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Exercise picked up from the 2e Microeconomics textbook.