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442 CHAPTER 11 MONOPOLY AND MONOPSONY TC

Total revenue, total cost, and profit (millions of dollars per year) $24

TR
0 4 8 Profit 12
Quantity (millions of ounces per year)
(a)

$12 MC

Price (dollars per ounce)

FIGURE 11.2 Profit Maximization
by a Monopolist
Panel (a): Total cost TC increases as Q increases.
Total revenue TR first increases and then de- MR D
creases, and so does profit. The monopolist’s
profit is maximized at Q 4 million ounces. 0 4 12
Panel (b): The monopolist’s profit-maximization Quantity (millions of ounces per year)
condition is MR MC, where the marginal (b)
revenue and marginal cost curves intersect.

cost: MR MC. For quantities greater than Q 4 million, producing less output in-
creases profit. Over this range, decreasing quantity decreases total cost faster than it
decreases total revenue, which also moves the firm up its profit hill. Over this range
of output, the monopolist’s marginal revenue is less than its marginal cost: MR MC.
Let’s summarize what this discussion implies:

• If the firm produces a quantity at which MR MC, the firm cannot be maxi-
mizing its profit because it could increase its output and its profit would go up.
• If the firm produces a quantity at which MR MC, the firm cannot be maxi-
mizing its profit because it could decrease its output and its profit would go up.
• Thus, the only situation at which the monopolist cannot improve its profit by
profit-maximization increasing or decreasing output is where marginal revenue equals marginal cost.
condition for a That is, if Q* denotes the profit-maximizing output, then
monopolist The condi-
tion that says that a MR(Q*) MC(Q*) (11.1)
monopolist maximizes profit
by producing a quantity at Equation (11.1) is the profit-maximization condition for a monopolist. Figure 11.2(b)
which marginal revenue shows this condition graphically: the quantity at which marginal revenue equals marginal
equals marginal cost. cost occurs where MR and MC cross.