Answer in Microeconomics for Erol #113277
1. In a monopoly, the marginal revenue is lower than the price because the demand curve is downward sloping. When prices go down, more units of the product are bought. Because of this, marginal revenue will not equal price. That’s why a monopoly’s revenue curve reaches its maximum at a larger quantity than does its profit curve.
2. If the firm reduces its price, then the quantity produced increases, and consumer surplus increases, but producer surplus may decrease or increase depending on the steepness of the marginal cost curve.
3. a) The monopoly produces Q* at MC = D.
b) A monopoly might shut down if it can only set a single price and its profit-maximizing price is lower than its average variable cost. But it will operate if it can perfectly price discriminate, because it can set different prices for different consumers depending on their willingness to pay.