PRICE (Dollars per subscription) 10.4, 28 IT ATC MC 0 2 MRID 4 6 8 10...
Profit maximization in monopoly situation
Monopolist is a price Maker. He will determine the quantity of output that will maximize revenue. The monopolist faces a downward sloping demand curve because he can sell more if he lowers the price. The profit maximizing price and output is where marginal revenue equals marginal cost, then it is extended to the market demand curve to determine what market price corresponds to that quantity.
The monopoly profit equals (P-ATC) x Q.
Q= where MR=MC=6,000
Profit =($50-$34) x 6000=$96,000.
Socially optimal outcome
The socially optimal quantity is at the intersection of MC and demand curve.
Q= MC=D= 12
Price at MC=D=$20
ATC is above $20, so there is a loss.
Fair return outcome
The fair return outcome is at the intersection of ATC and demand curve
Q= ATC=Demand curve= 10,400
Price at ATC=D=$28
Since P=ATC, the monopolist makes zero economic profit.
Pricing mechanism Quantity Price Profit Long run decision Subcriptions Dollars per subscription Profit Maximization 6000 50 Positive ( Price is above ATC) Continue in business Marginal Cost Pricing 12000 20 Negative ( Price is below ATC). Exit the industry Average Cost Pricing 10400 28 Zero Continue or exit Under the average cost pricing policy, the cable company has no incentive to cut costs.