Chapter 24, Problem 24.5SC

To determine

The relationship between AR and MR, the market equilibrium for a monopoly and the relationship between the various variables at the market clearing price

Introduction:

Monopoly Market- It is an extreme form of the imperfect market structure where all output is produced and sold by a single seller. The output produced is unique and has no close substitutes. The potential competitors of the monopolist do not have the information about the specialized production technique and the entry into and exit from the market is restricted.

Perfect Competition- It is an ideal market structure. It refers to a form of market where there is an infinite number of buyers and sellers in the market selling a homogenous good. There are no barriers to entry and exit, no transportation costs and no advertising costs. The market is characterized by perfect information of the buyers and the sellers are only price takers.

Marginal Revenue- It is the additional revenue earned by a seller by selling one more unit of output in the market.

Average Revenue- It is the Total Revenue (TR) divided by the number of units sold or the revenue per unit. Alternatively, it is called the price.

Average Fixed Cost (AFC)- Fixed Cost is the one-time expenditure incurred by a producer which is a liability irrespective of the level of output like rent for the building. Per unit fixed cost is the average fixed cost.

Average Variable Cost(AVC)- It is the cost incurred in producing each unit of output. It varies with the level of output like raw material cost, wages etc. Per unit variable cost is the AVC.

Average Total Cost (ATC)- It is the aggregate of AVC and the AFC.