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Determination Of Profit Maximisation Under Monopolist Situation

 Determination of Profit Maximisation under monopolist situation
Monopoly

            Monopoly profit optimization scale of productivity is estimated by associating its Total income, Value of product or price, marginal cost, at monopoly, a firm uses to estimate its equilibrium level of output.

            An illustration would explain which product combination has to be chosen in order to have maximum level of profit under monopoly.

Illustration 1

  1. Given that Total Productivity, Value of the Product and Total cost in a monopolist condition is represented in the below tablet. Ascertain Total earnings, Marginal earnings, Average Total Cost, Marginal cost and Profit under monopolist situation.

  2. Also ascertain the level of productivity which a monopolist selects in order to get optimum profits.

Total Productivity in units

Value of the Product in $

Total Cost in $

0

42

6

10

36

18

20

30

24

30

24

36

40

18

60

Solution

(i)

Total Productivity in units

Value of the Product in $

Total Cost in $

Total Earnings in $

Marginal Earnings in $

Average Total Cost in $

Marginal Cost in $

Profit under monopoly in $

0

42

6

0

0

0

0

-6

10

36

18

360

360

1.8

12

342

20

30

24

600

240

1.2

6

576

30

24

36

720

120

1.2

12

684

40

18

60

720

0

1.5

24

660

Workings of the above calculations

  1. Total earnings is ascertained by multiplying total productivity and value of the product

  2. Marginal earnings is computed by deducting one unit upward of total earnings, i.e. $600 - $360 = $240

  3. Formula for estimating average total cost is     Total Cost     =    60    =  1.5
                                                                       Total Productivity       40

  4. Similar to marginal revenue, marginal cost is also ascertained by deducting one unit upward of total cost, i.e. 36 – 24 = 12

  5. Profit under monopolist condition is obtained by deducting total cost from total earrings, i.e. 0 – 6 = -$6 (which is a loss under this combination).

(ii) To ascertain the next condition, that is the combination which  the monopolist select in order to earn optimum profit

And the solution to this is the combination 4 will be the best choice since, the total earnings as well as total profit is at the maximum. Also while we consider the marginal earnings and marginal cost, marginal earnings has depreciated as the productivity has increased and it goes below the marginal cost at the stage of producing 40 units. Hence we cannot judge the optimum profits with the help of marginal earnings and marginal cost for this kind of combinations.

Hence we could suggest the monopolist to choose 30 units, which would yield him total earnings and total profit at the optimum level.

Degree of Monopoly Power

            We can consider Lerner’s measure for estimating the degree of monopoly.

Lerner’s Measure

            Lerner’s measure is considered to be the oldest methods of calculating the monopoly power of negotiating potency. The disparity between price and marginal cost is the actual measure of estimating degree of monopoly power. A seller’s monopoly power depends upon his ability to sell his goods at a value much above the marginal cost. Greater the lag between the price and marginal cost, larger is the monopoly power. A competitive seller has no monopoly power at all, since under perfect competition price is equal to marginal cost. And the formula for estimating the degree of monopoly power under Lerner’s model is
                                                                                    (P – MC) / P
Where, P denotes price and MC denotes Marginal cost.

            Moreover if the seller is a monopolist the difference between price and marginal cost is always there. The index of monopoly will hence vary between zero and unity. For instance, if the price of a product is $10 and marginal cost is $4, then the index of monopoly power is (10-4) / 4 = 1.5

Illustration 2

Calculate Index of monopoly power by using Lerner’s measure. Given that the total output, Price and Average Cost. Also calculate monopoly power at output 40 units.

Total Output in units

Price of the output in $

Average Cost in $

0

100

-

20

200

5

40

400

4

60

600

3

Solution

  1. With the above tablet we come to know that average cost of the corresponding units of output are given and with these values it is not possible to compute under Lerner’s measure.

  2. Lerner’s model requires two aspects, price and marginal cost. Hence first we have to ascertain marginal cost. Now only average cost is given we have to ascertain the total cost first and subsequently the marginal cost.

Workings

Total Output in units

Price of the output in $

Total Cost

Marginal Cost

Average Cost in $

0

100

50

-

-

20

200

100

50

5

40

400

160

60

4

60

600

180

20

3

  1. From Average cost which is provided to ascertain total cost is estimated by multiplying average cost and total output, i.e. 20 x 5 = 100

  2. Similarly, marginal cost is ascertained by deducting one unit upward from the total cost, i.e. 180 – 160 = 20

  3. Now after ascertaining total costs and marginal costs for all the units of output, we can proceed with the measure of monopoly power at 40 units.

Computation of Lerner’s measure

                        By applying the formula (P-MC) / P, we obtain the value.

Monopoly power at 40 units is (400 – 60) / 400 = 0.85.


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