Monopoly Firm in Short Run and Long Run

3. Use the analysis developed in class and the text to explain the situation in question 2. Use economic reasoning and show your analysis using a graph or other model, as appropriate.

Price (RM Million)

Profit

AR=DD=P

MR

ATC

MC

A

0

26.7436 P₀

B

C

e

Quantity (units)

Figure A

Q₀ 1000

According to question 2, Tenaga Nasional Berhad is earning a supernormal profit or better known as an economic profit in short run and long run. Figure A illustrates the demand curve (DD) or average revenue curve (AR), marginal cost curve (MC), marginal revenue (MR), and average total cost curve (ATC) in a short run. Equilibrium is achieved when marginal revenue (MR) curve intersects with marginal cost (MC) curve. When these two curves intersect, profit maximizing level occurs. This can be shown at point e.

According to Tenaga Nasional Berhad’s annual report, we assume that the equilibrium price and quantity are RM 26.7436 and 1000 units. Total Revenue (TR) amount can be obtained using TR’s formula which is Price x Quantity. In figure A, price is located at average revenue’s (AR) curve. This is because average revenue (AR) is also the demand and price. Therefore, calculation is RM 26.743.6 million x 1000 units = RM 26,743.6 million. Based on the report in 2009, Tenaga Nasional’s total revenue (TR) is RM 26,743.6 million. In figure A, total revenue is shown at 0P₀BQ₀.

Whereas total cost (TC) amount can be calculated using its formula; ATC X Quantity. We assume that average total cost (ATC) is RM 25.64729 million. Therefore, total cost (TC) is RM 25,672.9 million based on the calculation RM 25.6729 million x 1000 units. In figure A, total cost (TC) is shown at 0ACQ₀. Tenaga Nasional Berhad’s profit at equilibrium output is RM 1,070.7 million. This profit of the year figure can be seen in Tenaga Nasional Berhad’s annual report.This can be calculated using profit formula; total revenue (TR) –...