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2 exam questions - Essay Example

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A pure monopolist determines that at the current level of output the marginal cost of production is $2. Average costs are $2.75 and average total costs are $2.95. The marginal revenue is $2.75. What would you recommend that the monopolist do to maximize profits?
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Download file to see previous pages... When this production run is optimized within the current output level, the total average cost per unit produces will decrease based on the simple fact that fixed cost per unit produced decreases as the number of output increases.
Investopedia (n.d.) explains that “the purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. The calculation is most often used among manufacturers as a means of isolating an optimum production level. The benefit of producing one additional unit and generating revenue from that item will bring the overall cost of producing the product line down. The key to optimizing manufacturing costs is to find that point or level as quickly as possible.”
Various reasons can be considered. For a monopolistic business, keeping the product’s presence in the market is necessary while waiting for the product’s improvements or innovations from the Research and Development department. Once these product improvement or innovation is achieved, the turn of events may become more profitable and may even achieve new heights of business success. Product substitutes may have caused the business to deteriorate. But as long as it is evident that product improvements or innovation will turn the tides of business back to original profitable track, it is worth keeping the business going. Otherwise, when there is no more prospects on the business line, continuing operation will just drain resources.
(John Wiley & Sons, Inc , n.d.) states that “if the firms average variable costs are less than its marginal revenue at the profit maximizing level of output, the firm will not shut down in the short-run. The firm is better off continuing its operations because it can cover its variable costs and use any remaining revenues to pay off some of its fixed costs.”
Demand curve for IPOD may rise with this increase on income level of young professionals. ...Download file to see next pagesRead More
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