•The profit received by the firm equals the total revenue(TR) minus the total cost (TC).

•If quantity* q1 *is produced, the total revenue is TR1 and total cost is TC1.

•The difference, TR1 – TC1, is the profit received*. *

•The same is depicted by the length of the line segment AB, i.e., the vertical distance between the TR and TC curves at* q1 *level of output.

•When output level is less than *q**2, the *TC curve lies above the TR curve, i.e., TC is greater than TR, and therefore profit is negative and the firm makes losses.

•The same situation exists for output levels greater than* q3. *

•Hence, the firm can make positive profits only at output levels between *q**2 and q3,*

•The monopoly firm will choose that level of output which maximises its profit.

•This would be the level of output for which the vertical distance between the TR and TC is maximum and TR is above the TC, i.e., TR – TC is maximum.

•This occurs at the level of output* q0.*

•Profit of the curve is plotted in the curve, which achieve maximum at* q0. *

•Profit of the monopoly firm is maximum at* q0.*

•The price at which this output is sold is the price consumers are willing to pay for this* q0 *quantity of the commodity*. *

•Hence, the monopoly firm will charge the price corresponding to the quantity level *q**0 *on the demand curve.

•The analysis of monopoly firm can also be conducted using Average and Marginal Revenue and Average and Marginal Cost.

•In Figure, the Average Cost (AC), Average Variable Cost (AVC) and Marginal Cost (MC) curves are drawn along with the Demand (Average Revenue) Curve and Marginal Revenue curve.

•At quantity level below* q0, *the level of MR is higher than the level of MC.

•Therefore, if the firm is producing a level of output less than* q0, *it would desire to increase its output since that would add to its profits.

•At quantity level below *q**0*, the level of MR is higher than the level of MC.

•Hence, the increase in total revenue from selling an extra unit of the commodity is greater than the increase in total cost for producing the additional unit.

•This implies that an additional unit of output would create additional profits since Change in profit = Change in TR – Change in TC.

•When the firm reaches an output level of *q*0, MR equals MC and increasing output provides no increase in profits.

•If the firm was producing a level of output which is greater than *q*0, MC is greater than MR.

•Hence, lowering of total cost by reducing one unit of output is greater than the loss in total revenue due to this reduction.

•It is therefore advisable for the firm to reduce output.

•At qo the firm will make maximum profits.

•It has no incentive to change from qo.

•This level is called the equilibrium level of output.

•Since this equilibrium level of output corresponds to the point where the MR equals MC, this equality is called the equilibrium condition for the output produced by a monopoly firm.

•At this equilibrium level of output *q*0, the average cost is given by the point ‘*d*’ where the vertical line from *q*0 cuts the AC curve.

•The average cost is thus given by the height *dq*0.

•Since total cost equals the product of AC and the quantity produced being *q*0, the same is given by the area of the rectangle *Oq*0*dc*.

•Once the quantity of output produced is determined, the price at which it is sold is given by the amount that the consumers are willing to pay, as expressed through the market demand curve.

•Thus, the price is given by the point ‘*a*’ where the vertical line through *q*0 meets the market demand curve D.

•Thus the price *aq*0 is the revenue per unit of output or the Average Revenue for the firm.

•The total revenue is the area of the rectangle *Oq*0*ab*.

•The total revenue is the area of the rectangle *Oq*0*ab*.

•The area of the rectangle *Oq*0*ab *is larger than the area of the rectangle *Oq*0*dc*, i.e., TR is greater than TC.

•The difference is the area of the rectangle *cdab i.e. * Profit = TR *– *TC

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