Examine the table on p. 618. The monopolist, in order to sell more, must lower the price of its product. Because of this, price exceeds marginal revenue. Compare the price and MR columns in the table. In fact, price exceeds marginal revenue for any market structure other than perfect competition.

To maximize profits, the monopolist uses the MR = MC method. In the table on page 618, you will not find an exact equality between MR and MC. Scan the MR and MC columns together. Increase the production level as long as MR exceeds MC but do not choose a level of production such that MC exceeds MR. That is, satisfy the condition MR = MC without letting MC rise above MR. Profit maximization occurs at a quantity of 4. At first, this seems strange because MR = 15 and MC = 9, but if production is increased to Q = 5, then MR = 9 and MC = 16. So Q = 5 does not work. Verify that Q = 4 is the best choice by using the secondary method of TR - TC.

From this table , what is the lowest possible price the monopolist could accept over the long-run? Recall that total costs must be covered in the long-run. Check the ATC column (7) and find the lowest entry. It is $15.50 at a quantity of 4. In this production function, four also happens to be the profit maximizing level of production according to the MR = MC method. In other production functions, the quantity associated with the lowest acceptable long-run price may be different from the quantity chosen using MR = MC. Note that at a price of $15.50, total costs of $62 are just covered (4 x $15.50).

Now look in the price column (2) and examine the price range of $9 to $18. As price is increased in this range, total revenue also goes up, indicating inelastic demand. As long as demand is inelastic, the monopolist can increase profits by raising price. Total revenue will rise due to the inelasticity while costs will go down because the monopolist will sell less, according to the law of demand. The inelastic price range is associated with negative marginal revenue entries in column four. Therefore, we know that the monopolist will not choose a price-quantity combination that is in the inelastic portion of its demand curve. In order to determine the specific profit-maximizing price-quantity combination, use the MR = MC method. This firm will pick Q = 4 and charge a price of $24. Based on the discussion above, it is clear that the profit-maximizing price-quantity combination will be in the elastic portion of the demand curve.

Can you tell from the table on p. 618 how much fixed costs must be? Yes, because at Q = 0, there are no variable costs. All costs are fixed. At Q = 0, TC = $47, therefore FC = $47. If you wanted to, you could add another column to this table for Variable Cost (TC - FC = VC). You could also add a column for Average Variable Cost (AVC). Go ahead and do this now. What is the lowest possible price this monopolist could accept in the short-run?

For this production function, the answer is $1 at Q = 1. This may seem bizarre at first, and in other production functions, it could be quite different. At Q = 1, VC = 1, and AVC also = 1 (1 divided by 1). AVC goes up from this point. If you added columns, you noticed this pattern.

In other production functions, AVC may come down at first, then turn around and begin to rise.