Figure 10-2 Short-Run Profit Maximization for a Monopolist
Short-Run Profit Maximization
We began this chapter by noting that the cost concepts from Chapter
apply equally to a monopolist as to a competitive firm. We have now
examined a monopolist’s average and marginal revenues and are
therefore ready to combine the cost and revenue information to
determine the monopolist’s profit-maximizing price and level of output.
Recall the two general rules about profit maximization from Chapter
Rule 1: The firm should produce only if price (average revenue) exceeds
average variable cost.
Rule 2: If the firm does produce, it should produce a level of output such
that marginal revenue equals marginal cost.
Figure 10-2 illustrates a monopolist’s choice of output to equate its
marginal cost with its marginal revenue. Recall that it is the intersection
of the MR and MC curves that determines the firm’s profit-maximizing
quantity. For the monopolist, the price is then determined by the demand
curve. With the firm’s costs given by the ATC curve shown in the figure,
the monopolist is making positive profits, as shown by the shaded area.