question archive Suppose Mark is the only economics tutor in town and therefore holds a monopoly on the sale of economics tutoring
Suppose Mark is the only economics tutor in town and therefore holds a monopoly on the sale of economics tutoring
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Suppose Mark is the only economics tutor in town and therefore holds a monopoly on the sale of economics tutoring. The table below shows the demand schedule for his services. Mark can offer additional hours of tutoring at a constant marginal cost of $2 per hour, and he has no fixed costs. If Mark acts as a monopolist, how many hours will he offer and what price will he charge? Calculate Mark's monopoly profit.
| Quantity of Economics of Tutoring Demanded (hours) | Price of Economics Tutoring (per hour) |
|---|---|
| 0 | $6 |
| 1 | $5 |
| 2 | $4 |
| 3 | $3 |
| 4 | $2 |
| 5 | $1 |
| 6 | $0 |
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To solve this problem we need to add two columns to the table above. The first is total revenue which is just quantity multiplied by price. The second is marginal revenue which is the change in total revenue.
| Quantity of Economics of Tutoring Demanded | Price of Economics Tutoring | Total Revenue | Marginal Revenue |
|---|---|---|---|
| 0 | $6 | $0 | $0 |
| 1 | $5 | $5 | $5 |
| 2 | $4 | $8 | $3 |
| 3 | $3 | $9 | $1 |
| 4 | $2 | $8 | -$1 |
| 5 | $1 | $5 | -$3 |
| 6 | $0 | $0 | -$5 |
Once we get the above table, the profit maximizing point is the last point where marginal revenue is at or above marginal cost. Marginal cost is constant at $2 so this happens when Mark sells a quantity of 2 and charges a price of $4. His total revenue at that level is $8 and his total cost is 2*$2=$4. Thus, his monopoly profit is $4.
