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Monopoly Behavior

What do monopolists do? If the monopolist is a private firm, generally we assume that it chooses the level of output to maximize profits. As an accounting matter, profits (PR) are equal to total revenue (TR) minus total costs (TC):

PR = TR - TC

For any firm, not just a monopolist, it can be shown that profit will be maximized at the quantity where marginal revenue is equal to marginal cost:


What makes a monopolist different from a competitive firm is that it faces a downward sloping demand curve: it knows that it will have to cut its price in order to sell more output. As a result, its MR curve will slope down rather than being flat like a competitive firm's.

Additional Resources

Numerical Example
PDF file showing a numerical example illustrating the difference between the demand and MR curves.
Excel spreadsheet used to generate the PDF file above.
An interactive monopoly simulation game.
Calculus Version
Solving the monopolist's problem using differentiation.
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 08/18/2016