A pure monopolist sells output for $4.00 per unit at the current level of production. At this level of output, the marginal cost is $3.00, average variable costs are $3.75, and average total costs are $4.25. The marginal revenue is $3.00. What is the
short-run condition for the monopolist and what output changes would you recommend?
What will be an ideal response?
The monopolist should make no change in the level of output because the marginal costs equal the marginal revenue at the current level of output. However, the monopolist is experiencing short-run losses because average total cost is greater than the price (average revenue). In the long run, the monopolist may want to try to shift the demand curve so that price is greater than average total cost at the current level of production. The monopolist may also want to find ways to reduce average costs.
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