Consider the graph below, which illustrates the demand for Fluff. Fluff can be produced at a constant marginal and average total cost of $4 per case.
a. Draw in a carefully constructed marginal revenue curve.
b. Apply the MR = MC rule to determine the profit-maximizing level of output. What price must the monopolist charge to maximize profit?
c. Calculate the profit earned by the monopolist.
d. The slope of the demand curve indicates that in order to sell one more unit, the price must fall by 20 cents. Verify that the seller cannot increase profit by reducing price and selling slightly more.
e. The slope of the demand curve indicates that if the price of Fluff increases by 20 cents, consumers will buy one less unit. Verify that the seller cannot increase profit by increasing price and selling slightly less.