AP_Krugman_Textbook

Applying the optimal output rule, we see that the profit-maximizing level of output,
identified as the quantity at which marginal revenue and marginal cost intersect (see
pointA), is QM.The monopolist charges the highest price possible for this quantity,
PM,found at the height of the demand curve at QM(see point B). At the profit-maxi-
mizing level of output, the monopolist’s average total cost is ATCM(see point C).
Recalling how we calculated profit in Equation 59-1, profit is equal to the difference
between total revenue and total cost. So we have

(61-4) Profit =TR−TC

=(PM×QM)−(ATCM×QM)

=(PM−ATCM)×QM.

Profit is equal to the area of the shaded rectangle in
Figure 61.4, with a height of PM−ATCMand a width
ofQM.
We learned that a perfectly competitive industry
can have profits in the short run but not in the long run.
In the short run, price can exceed average total cost,
allowing a perfectly competitive firm to make a
profit. But we also know that this cannot persist. In
the long run, any profit in a perfectly competitive in-
dustry will be competed away as new firms enter the
market. In contrast, while a monopoly can earn a
profit or a loss in the short run, barriers to entry
make it possible for a monopolist to make positive
profits in the long run.

module 61 Introduction to Monopoly 615

Section 11 Market Structures: Perfect Competition and Monopoly

Reprinted with special permission of King Feature Syndicate.

Module 61 AP Review

Check Your Understanding

1. Use the accompanying total revenue schedule of Emerald, Inc.,
   a monopoly producer of 10-carat emeralds, to calculate the
   items listed in parts a–d. Then answer part e.
   Quantity of emeralds demanded Total revenue
   1 $100
   2 186
   3 252
   4 280
   5 250
   a. the demand schedule (Hint: the average revenue at each
   quantity indicates the price at which that quantity would be
   demanded.)
   b. the marginal revenue schedule
   c. the quantity effect component of marginal revenue at each
   output level
   d. the price effect component of marginal revenue at each
   output level
   e. What additional information is needed to determine
   Emerald, Inc.’s profit-maximizing output?
   2. Replicate Figure 61.3 and use your graph to show what happens
   to the following when the marginal cost of diamond
   production rises from $200 to $400. Use the information in
   Table 61.1 to identify specific numbers for prices and quantities
   on your graph.
   a. the marginal cost curve
   b. the profit-maximizing price and quantity
   c. the profit of the monopolist
   d. the quantity that would be produced if the diamond
   industry were perfectly competitive, and the associated
   profit

Solutions appear at the back of the book.