📚 Topic Summary
A monopolist maximizes profit by producing at the quantity where marginal revenue (MR) equals marginal cost (MC). Marginal revenue is the additional revenue gained from selling one more unit, while marginal cost is the additional cost of producing one more unit. The monopolist then uses the demand curve to determine the price at which it can sell that quantity. Because a monopolist faces a downward-sloping demand curve, it must lower its price to sell more units, which means that its marginal revenue is less than its price. This contrasts with perfectly competitive firms, where price equals marginal cost at the profit-maximizing quantity.
Understanding the MR=MC rule is crucial for analyzing how monopolies operate and their impact on market outcomes. When MR > MC, the monopolist can increase profit by producing more. When MR < MC, the monopolist can increase profit by producing less. The optimal output level is where these two are equal. This leads to higher prices and lower quantities compared to competitive markets, resulting in deadweight loss.
🧠 Part A: Vocabulary
Match the terms with their definitions:
| Term |
Definition |
| 1. Marginal Revenue |
A. The change in total cost resulting from producing one more unit. |
| 2. Marginal Cost |
B. A market structure with a single seller. |
| 3. Monopoly |
C. The change in total revenue resulting from selling one more unit. |
| 4. Demand Curve |
D. A graph showing the relationship between the price of a good and the quantity consumers are willing to buy. |
| 5. Profit Maximization |
E. The process by which a firm determines the price and output level that returns the greatest profit. |
✏️ Part B: Fill in the Blanks
A monopolist maximizes profit where ________ equals ________. Unlike firms in perfect competition, a monopolist faces a downward-sloping ________ curve, meaning it must lower its ________ to sell more. This results in the monopolist's ________ revenue being less than the ________.
🤔 Part C: Critical Thinking
Explain why a monopolist's output decision leads to a deadweight loss in society. Use the concepts of consumer surplus and producer surplus in your explanation.