A PURE MONOPOLIST SELLS OUTPUT FOR $4 PER UNIT. THE MARGINAL COST IS $3, AVERAGE VARIABLE COSTS ARE $3.75, AND AVERAGE TOTAL COSTS ARE $4.25. THE MARGINAL RVENUE IS $3. WHAT IS THE SHORT RUN CONDITION FOR THE MONOPOLIST AND WHAT OUTPUT CHANGES WOULD YOU RECCOMMEND IN THE LONGER RUN?

Question

A PURE MONOPOLIST SELLS OUTPUT FOR $4 PER UNIT.  THE MARGINAL COST IS $3, AVERAGE VARIABLE COSTS ARE $3.75, AND AVERAGE TOTAL COSTS ARE $4.25.  THE MARGINAL RVENUE IS $3.  WHAT IS THE SHORT RUN CONDITION FOR THE MONOPOLIST AND WHAT OUTPUT CHANGES WOULD YOU RECCOMMEND IN THE LONGER RUN?

SraJMcGin · Answer

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Sra

economyst · Answer

As MC=MR, the monopolist is at its optimal position in the short run. However, as average total cost are above $4, the firm is losing money. So, long run, either the firm shuts down, or figures out a way to cut costs.