Question

A monopoly firm has a total fixed cost of Rs 100 and has the following demand schedule:

| Quantity | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Marginal Revenue | 100 | 90 | 80 | 70 | 60 | 50 | 40 | 30 | 20 | 10 |

Find the short run equilibrium quantity, price and total profit. What would be the equilibrium in the long run? In case the total cost is Rs 1000, describe the equilibrium in the short run and in the long run.

Answer 1

| Quantity | Price (P) (Rs) | TR= P x Q(Rs) |
| 1 | 100 | 100 |
| 2 | 9 | 180 |
| 3 | 80 | 240 |
| 4 | 70 | 280 |
| 5 | 60 | 300 |
| 6 | 50 | 300 |
| 7 | 40 | 280 |
| 8 | 30 | 240 |
| 9 | 20 | 180 |
| 10 | 10 | 100 |

As the total cost of the monopolist firm is zero, the profit will be the maximum where TR is maximum. That is, at the 6th unit of output the firm will be maximising its profit and the short run equilibrium price will be Rs 50.
Profit = TR – TC
= 300 – 0
Profit = Rs 300
If the total cost is Rs 1000, then the equilibrium will be at a point where the difference between TR and TC is the maximum. TR is the maximum at the 6th level of output.

So profit = 300 – 1000 = - 700
So, the firm is earning losses and not profit. As the monopolist firm is incurring losses in the short run, it will stop its production in the long run.