Figure 16-4Refer to Figure 16-4. How much output will the monopolist produce in order to maximize profit?

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BlackTom AI · Accepted Answer

To determine the profit‑maximizing output for a monopolist, we start from the core rule: produce the quantity where marginal revenue (MR) equals marginal cost (MC), as long as the price covers average total cost (ATC) in the long run. In the provided figure, the MR and MC lines intersect at the quantity labeled W. Option analysis context (note: the actual list of options isn’t shown in the prompt, but we’ll reason with the assumption that option labels include W among the choices): - Why MR = MC point matters: If MR > MC, the additional unit adds more to revenue than to cost, so profitability would rise by producing another unit. Conversely, if MR < MC, producing an extra unit would reduce profit, so output should be reduced. The profit‑maximizing point is where MR just equals MC. - Observing the diagram: The MR curve intersects the MC curve at a specific quantity, which is labeled W. At this output, the monopolist is maximizing the difference between total revenue and total cost, i.e., profit, assuming the price from the demand curve at W covers the associated average total cost (ATC). If price at W were below ATC, the firm would incur losses in the long run and might exit or reduce output in a dynamic setting. - Why not other candidate quantities (e.g., T or Z, if those are other options): • If a candidate quantity is to the left of the MR=MC intersection (e.g., T), MR would still exceed MC or the misalignment would imply you can increase profit by expanding output until MR = MC, so T would yield lower profit than W. • If a candidate quantity is to the right of MR=MC (e.g., Z), MC would exceed MR, so producing more would reduce profit, again making Z suboptimal relative to W. - Additional considerations: The monopolist’s price comes from the demand curve at the chosen output. Even at MR = MC, the price may be above ATC, yielding positive profit, or it could be just at ATC in a break‑even scenario. The diagram appears to show a price corresponding to the intersection with the demand curve, confirming the presence of a positive profit area at W. - Summary conclusion: The profit‑maximizing output for the monopolist is the quantity where MR = MC, which, in the diagram, corresponds to the quantity labeled W. Any other labeled quantity would either underproduce (MR > MC would suggest more output) or overproduce (MR < MC would suggest less output), resulting in lower profit.

Figure 16-4Refer to Figure 16-4. How much output will the monopolist produce in order to maximize profit?

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