[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

of $9,000, it sells 2 units; and at a price of $8,000, 3 units. The
third column of the table shows the total revenues at each of
these levels of production. The total revenues are just price multiplied
by quantity. The marginal revenue from producing an
extra unit (of 1,000 cubic yards) is just the difference between,
say, the revenues received at 3 units and 2 units or 2 units and
1 unit. Note that in each case, the marginal revenue is less than
the price.
Figure 12.4 shows the firm’s demand and marginal revenue
curves, using data from Table 12.1. At each level of output, the
marginal revenue curve lies below the demand curve. As can be
seen from the table, not only does price decrease as output
increases, but so does marginal revenue.
The output at which marginal revenue equals marginal cost—
the output chosen by the profit-maximizing monopolist—is
denoted by Q m . In our example, Q m = 4,000 cubic yards. When
the number of cubic yards increases from 3,000 to 4,000, the
marginal revenue is $4,000, and so is the marginal cost. At this level of output,
the price, p m , is $7,000 (per 1,000 cubic yards), which is considerably in excess
of marginal costs, $4,000. Total revenues, $28,000, are also in excess of total
costs, $24,000. 1
PRICE ($)
10,000
P m = 7,000
4,000
2,000
Figure 12.4
Marginal
cost curve
Demand
curve
0 1 2 3 Q m = 4
Average
cost curve
Marginal
revenue
curve
QUANTITY (THOUSANDS OF CUBIC YARDS)
DEMAND AND MARGINAL REVENUE
5 6
At each level of output, the marginal revenue curve lies below
the demand curve.
MONOPOLY PROFITS
Monopolists maximize their profits by setting marginal revenue equal to marginal
cost. The total level of monopoly profits can be seen in two ways, as shown in Figure
12.5. Panel A shows total revenues and total costs (from Table 12.1) for each level of
output of the ABC-ment Company. The difference between revenues and costs is
profits—the distance between the two curves. This distance is maximized at the
output Q m = 4,000 cubic yards. We can see that at this level of output, profits are
$4,000 ($28,000 − $24,000). Panel B calculates profits using the average cost diagram.
Total profits are equal to the profit per unit multiplied by the number of units
produced. The profit per unit is the difference between the unit price and the average
cost, and total monopoly profits is the shaded area ABCD. Again, the sum is
$4,000: ($7,000 − $6,000) × 4.
A monopolist enjoys an extra return because it has been able to reduce its output
and increase its price from the level that would have prevailed under competition.
This return is called a pure profit. Because these payments do not elicit greater
effort or production on the part of the monopolist (in fact, they derive from the
monopolist’s reducing the output from what it would be under competition), they
are also called monopoly rents.
1 In this example, the firm is indifferent to the choice between producing 3,000 or 4,000 cubic yards. If the marginal
cost of producing the extra output exceeds $4,000 by a little, then it will produce 3,000 cubic yards; if the
marginal cost is a little less than $4,000, then it will produce 4,000 cubic yards.
MONOPOLY OUTPUT ∂ 265