Quantity per time period
As a monopoly, the Hair Stylist provides all industry output. For simplicity, assume that the Hair Stylist operates a chain of salons and that the cost function for each shop is the same as in the previous example. By operating each shop at its average cost-minimizing activity level of 750 hairstylings per month, the Hair Stylist can operate with Marginal Cost = Average Cost = $20.
Assume that industry demand and marginal revenue curves for hair stylings in the College Park market are
The monopoly profit-maximizing activity level is obtained by setting marginal revenue equal to marginal cost, or marginal profit equal to zero (Mn = 0), and solving for Q:
Q = 37,500 hairstylings per month
The optimal market price is
At the Q = 37,500 activity level, the Hair Stylist will operate a chain of 50 salons (= 37,500/750). Although each outlet produces Q = 750 hairstylings per month, a point of optimum efficiency, the benefits of this efficiency accrue to the company in the form of economic profits rather than to consumers in the form of lower prices. Economic profits from each shop are n = TR - TC
= P X Q - AC X Q = $50(750) - $20(750) = $22,500 per month
With 50 shops, the Hair Stylist earns total economic profits of $1,125,000 per month. As a monopoly, the industry provides only 37,500 units of output, down from the 75,000 units provided in the case of a perfectly competitive industry. The new price of $50 per hairstyling is up substantially from the perfectly competitive price of $20. The effects of monopoly power are reflected in terms of higher consumer prices, reduced levels of output, and substantial economic profits for the Hair Stylist, Inc.
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