HAT Manifesto Part 1/3 - Rubric Cube - 250803 edit

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5^th Ed.

PART 5  Firm Behavior and the Or

ganization of Industry

Chapter 15 of 36  Monopoly

Section  7 of 32

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Table 1 here

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Table 1 shows data for a monopoly firm, a single producer of water for a town.

The monopoly's revenue depends on the amount of water produced.

Columns 1 and 2 show the monopoly's demand schedule: quantity and price

· produce 1 gallon it can sell that gallon for $10

· produce 2 gallons, must lower price to $9 to sell 2 gallons

· produce 5 gallons, must lower price to $6 to sell 5 gallons

· produce 8 gallons, must lower price to $3 to sell 8 gallons

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A graph of columns 1 and 2 of numbers would be a typical downward-sloping demand curve, like Figure 2(b) previous section.

Column 3 of the table data show the monopoly firm's total revenue.

Column 4 shows the firm's average revenue at each quantity level.

Note average revenue always equals the price of the good.

Column 5 shows the firm's marginal revenue, which is the amount of revenue the firm receives for each additional unit of output, moving down column 3.

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Marginal revenue is the change in total revenue when output increases by 1 unit

· when the firm is producing 3 gallons of water, it receives total revenue of $24

· when the firm is producing 4 gallons of water, it receives total revenue of $28

So, the marginal revenue of the 4^th gallon of water is $4.

Table 1 shows results important for understanding monopoly behavior

· a monopoly firm's marginal revenue is always less than the price of its good

· to maximize revenue it must reduce price down to where marginal revenue is zero

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