Stumptown Sewer has a monopoly on the provision of sewage disposal services to t
ID: 1217081 • Letter: S
Question
Stumptown Sewer has a monopoly on the provision of sewage disposal services to the greater Stumptown area. The monthly demand for services by households in this market is given in columns 1 & 2 of the table below. Stumptown's monthly marginal cost of service provision per house is given in columns 2 & 3 Use columns 1 & 2 to calculate Stumptown's total revenue and marginal revenue per house at every price level. Find the monopoly price in this market, and find the number of houses served by Stumptown Sewer. Write down the monopoly's profit-maximizing decision rule.Explanation / Answer
Q (houses)
The above table is solved using the following basics:-
TR = Price * Quantity
MR = change in TR / Change in quantity
Now, where MC equals MR will be the optimal profit maximization. Thus as per the table above it will be MC=MR=40 which is for 4 houses.
The monopoly’s profit maximizing decision rule is where MC equals MR is the optimum profit of the organization.
Price ($/houses)Q (houses)
MC ($/ houses) TR ($) MR ($/Houses) Change in TR 100 1 40 100 100 0 90 2 40 180 80 80 80 3 40 240 60 60 70 4 40 280 40 40 60 5 40 300 20 20 50 6 40 300 0 0 40 7 40 280 -20 -20