Question

Total revenue and Total Cost approach determine price and equilibrium under monopoly. Discuss.

Answer 1

Under the total revenue (TR) and total cost (TC) approach, a monopolist reaches equilibrium by maximizing profit, where the difference between TR and TC is the greatest. This occurs at the output level where MR = MC (marginal revenue equals marginal cost).

1. Calculate TR and TC: Total revenue is the product of price and quantity sold, while total cost includes all production expenses.
2. Identify Profit Maximization Point: The monopolist produces at the output level where the vertical distance between the TR and TC curves is the largest.
3. Check the MR = MC Condition: At this point, the slope of the TR curve (MR) is equal to the slope of the TC curve (MC), ensuring profit maximization.

At this equilibrium, the monopolist sets a higher price and produces a lower output compared to a competitive firm, resulting in supernormal profits and a deadweight loss to society.