How+a+Monopolist+Determines+P*+and+Q*

Like all market structures, normal monopolists choose to produce the quantity at which marginal revenue equals marginal cost. This way they are able to squeeze every last bit of profit possible out of their production. However, in perfect competition, MR was equal to the demand curve. In monopolists, MR is below demand, and therefore they produce less than what perfect competition would dictate. Then, from Q*, monopolists determine P* by shifting directly vertical to where the demand curve intersects with Q*. This means that monopolies make less stuff for more money than perfect competitors and thats why they are looked down upon.

However, monopolists with price discrimination produce more because MR=D. They produce where D=MC, and then charge every price possible on the demand curve for each potential quantity up to Q*. This allows them to make more profit by classifying people into what they will pay for the product and charging them that. When regulated, monopolies also do things differently. If regulated at fair return price, they choose P* where ATC intersects the demand curve. Then they draw a straight line down to find Q*. If socially optimal price regulation, they choose P* where MC intersects the demand curve, and draw a straight line down to find Q*.

media type="youtube" key="Xlpo4F6MdbM" height="344" width="425" This video further shows ways to determine P* and Q* and gives an explanation why. Wait till 1:30ish to get to that point. Question: What curve would one draw a vertical line to from Q* to get P*? a) MR b) D c) MC d) AFC

Further Links: http://en.wikipedia.org/wiki/Monopolistic_competition http://facweb.furman.edu/~dstanford/mecon/d3.htm http://ingrimayne.com/econ/International/MonoComp.html

The answer is B, the demand curve.