MR MC Rule

A monopolist seeking to maximize total profit will employ the same rationale as a profit-seeking firm in a competitive industry. It will produce another unit of output as long as that unit adds more to total revenue than it adds to total cost. The firm will increase output up to the output at which marginal revenue equals marginal cost (MR = MC).

A comparison of columns 4 and 7 in Table 10-1 indicates that the profit-maximizing output is five units, because the fifth unit is the last unit of output whose marginal revenue exceeds its marginal cost. What price will the monopolist charge? The demand schedule shown as columns 1 and 2 in Table 10-1 indicates there is only one price at which five units can be sold: $122.

This analysis is shown in igure 10-4 (Key Graph), where we have graphed the demand, marginal-revenue, average-total-cost, and marginal-cost data of Table 10-1.

Part Two • Microeconomics of Product Markets

Key Graph

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