The monopolist sets marginal revenue equal to marginal cost at MR=MC=$10.
The optimal quantity is thus 90 units, which implies a market price of $55/unit.
The monopoly profits (light blue in the graph) are the difference between price ($55) and average total cost ($44.44) times the number of units sold.
Notice that our monopolist is a “natural monopoly” the average total costs decline over the entire relevant range of production and the minimum efficient scale (150) is bigger than the entire market.
Notice that if our monopolist operated at the competitive equilibrium (Price=MC=$30, Quantity=140), the firm would make a loss (ATC>Price).
Implications of the Monopolist’s Profit Maximum
Price will exceed the competitive price.
Quantity will be less than the competitive quantity.
The monopolist sells the output at a price greater than marginal costs but the monopoly price can be above or below average total costs. Thus, the monopolist need not always make a profit. In the long run, of course, unprofitable monopolists will either stop production or raise the price further above marginal cost until it covers average total costs.
The monopolist will always try to operate on the elastic portion of the demand curve because when the elasticity of demand is greater than -1 (inelastic, between 0 and 1 in absolute value), marginal revenue is negative and, necessarily, less than marginal cost.
Since there is no entry to consider monopolists can have persistent long run economic profit.
The data on your handout show the demand curves for movie tickets of adults and seniors. The market described has only one movie theatre.
Find the best single price.
If the movie theater can charge separate prices for adults and seniors, what are the best two prices?
Two Prices are Better than One for Movie Tickets
The best single price in this market is $7.50/ticket, which makes economic profits of $4,225 (blue entries). Set marginal cost = marginal revenue with the single price.
The price discriminating monopolist can make more economic profits by charging adults $8.50 (yellow entries) and seniors $6.50 (green entries). Set marginal cost = marginal revenue separately for each market.
Natural monopolies are regulated by price commissions that determine the rates the monopolies may charge.
Patent, copyright and license protections are a form of ex ante regulation: firms that follow the rules for establishing the validity of their innovations receive the protection of the patent, copyright or license.