12 . Profit maximization and loss minimization

BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville. Suppose that BYOB cannot price discriminate; that is, it sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) for beer in this market.

Place the black point (plus symbol) on the graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss.

Monopoly Outcome

Profit

Loss

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0

PRICE (Dollars per can)

QUANTITY (Thousands of cans of beer)

D

MR

MC

ATC

Suppose that BYOB charges $2.00 per can. Your friend Kenji says that since BYOB is a monopoly with market power, it should charge a higher price of $2.25 per can because this will increase BYOB's profit.

Complete the following table to determine whether Kenji is correct.

PriceQuantity DemandedTotal RevenueTotal CostProfit(Dollars per can)(Cans)(Dollars)(Dollars)(Dollars)2.00 2.25

Given the earlier information, Kenji correct in his assertion that BYOB should charge $2.25 per can.

Suppose that a technological innovation decreases BYOB's costs so that it now faces the marginal cost (MC) and average total cost (ATC) given on the following graph. Specifically, the technological innovation causes a decrease in average fixed costs, thereby lowering the ATC curve and moving the MC curve.

Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing the loss.

Monopoly Outcome

Profit

Loss

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0

PRICE (Dollars per unit)

QUANTITY (Thousands of cans of beer)

D

MR

MC

ATC