Betty runs a burger joint for tourists, kilometres from the nearest town. She has a monopoly and faces the demand schedule as shown in Table 1 for burgers. Assume Betty’s average cost and marginal cost are constant at $2 a meal. Table 1 – Betty’s Burgers - Demand Schedule Quantity demanded (burgers per week): 160, 140, 120, 100, 80, 60, 40, 20, 0 Price = AR ($): 1, 2, 3, 4, 5, 6, 7, 8, 9 TR ($): 160, 280, 360, 400, 400, 360, 280, 160, 0 MR: 0, 1.2, 0.8, 0.4, 0, -0.4, -0.8, -1.2, -1.6 MC: 2, 2, 2, 2, 2, 2, 2, 2, 2 TC: 320, 280, 240, 200, 160, 120, 80, 40, 0 Profit: -160, 0, 120, 200, 240, 240, 200, 120, 0 b) What is the range for the profit maximising monopoly price and between how many burgers will Betty sell a week? Why?
Question
Betty runs a burger joint for tourists, kilometres from the nearest town. She has a monopoly and faces the demand schedule as shown in Table 1 for burgers. Assume Betty’s average cost and marginal cost are constant at ): 1, 2, 3, 4, 5, 6, 7, 8, 9 TR ($): 160, 280, 360, 400, 400, 360, 280, 160, 0 MR: 0, 1.2, 0.8, 0.4, 0, -0.4, -0.8, -1.2, -1.6 MC: 2, 2, 2, 2, 2, 2, 2, 2, 2 TC: 320, 280, 240, 200, 160, 120, 80, 40, 0 Profit: -160, 0, 120, 200, 240, 240, 200, 120, 0
b) What is the range for the profit maximising monopoly price and between how many burgers will Betty sell a week? Why?
Solution
To determine the profit-maximizing monopoly price and the number of burgers Betty will sell per week, we need to find where the Marginal Revenue (MR) equals the Marginal Cost (MC).
Looking at the table, we can see that the MR equals the MC at two points: when the price is 6. However, we also need to consider the profit. At a price of 0), but at a price of 240.
Therefore, the profit-maximizing monopoly price is $6, and at this price, Betty will sell 60 burgers per week.
The reason for this is that in a monopoly, the profit-maximizing quantity is determined by the point where MR equals MC. At any price above this, the cost of producing an additional unit (MC) would be greater than the revenue gained from selling it (MR), resulting in a loss. Conversely, at any price below this, the revenue gained from selling an additional unit (MR) would be greater than the cost of producing it (MC), so the monopolist could increase profit by producing more.
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