MARKETS WITH MARKET POWER - Tufts University

Exercise on Monopoly Profit-Maximization
Before World War II, the Alcoa corporation had a monopoly in the production of aluminum. Assume that its demand
and cost data are as follows:
demand curve
quantity, q
average
total cost,
ATC
price, p
11 93 10
12 91 11
13 89 13
14 87 15
15 85 17
16 83 20
17 81 24
18 79 28
A) Use the numbers above to fill in the following table:
quantity, q
total
revenue, TR
marginal
revenue,
MR
marginal
cost, MC
total cost,
TC total profit
11 _______ _______ _______ _______ _______
12 _______ _______ _______ _______ _______
13 _______ _______ _______ _______ _______
14 _______ _______ _______ _______ _______
15 _______ _______ _______ _______ _______
16 _______ _______ _______ _______ _______
17 _______ _______ _______ _______ _______
18 _______ _______ _______ _______ _______
B) What is the profit-maximizing level of output? ____________________
C) What is the profit-maximizing price? ________________________
D) Given the average total cost data, what profit is Alcoa making per unit of output?________
E) Assume that Alcoa acted as if it were perfectly competitive, setting price equal to MC, where
the price is determined by the demand curve. Then its short-run profit-maximizing output level = _______
F) In this case, its short-run profit-maximizing price = _______________
G) What would be the profits per unit of Alcoa in this case? ____________
H) Which is more profitable to Alcoa, to act as a competitive firm or as a monopolist?
Chapter 12 − Markets with Power 15