9.1 Monopoly Profit Maximization

All firms, including competitive firms and monopolies, maximize their profits by setting quantity such that marginal revenue equals marginal cost (Chapter 7). Chapter 6 demonstrates how to derive a marginal cost curve. We now derive the monopoly’s marginal revenue curve and then use the marginal revenue and marginal cost curves to examine how the manager of a monopoly sets quantity to maximize profit.

Marginal Revenue

A firm’s marginal revenue curve depends on its demand curve. We will show that a monopoly’s marginal revenue curve lies below its demand curve at any positive quantity because its demand curve is downward sloping.

Marginal Revenue and Price.

A firm’s demand curve shows the price, p, it receives for ...

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