We would like to confirm diagrammatically that OQ quantity of output ensures maximum profit (figure 11.4). This can be tested by examining profits corresponding to three levels of output – profit at OQ level of output, at a slightly smaller quantity than OQ output level and a slightly higher quantity than OQ level of output.
Suppose, the monopolist produces a smaller amount (say, Qd) than OQ. Following figure 11.4, we can say that at Qa output level, the MR is QaW and MC is QaX. Obviously, MRQa > MCQa, which means that selling price (P) is more than the cost involved to produce it.
If the monopolist produces more than Qa, each additional unit will contribute to its profit pool, though the profit from each additional unit will get reduced because as we move in the rightward direction starting from point Qa, the gap between MR and MC gets reduced.
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This continues until Q quantity is produced, because at this point, MC = MR = QA. So, the monopolist can increase the total profit by increasing the output level from Qa. This establishes the fact that total profit is not maximised if the monopolist produces Qa quantity. Here Qa stands for any output level less than OQ quantity.
Similarly, if the monopolist produces more than Q (say, Qb), the MR b will be equal to QbZ, while MCQb will be at QbY, i.e., at Qb output level, MC exceeds MR. This implies that the cost involved in production of each additional unit is greater than the revenue earned by selling that unit. The diagram shows that this gap (i.e., per unit loss) increases as we move rightward from point Qb and reduces as we move leftward from point Qb.
Per unit loss becomes zero when the output equals OQ. Here Qb represents any output level more than OQ. Thus, it is justified to say that total profit is maximised at Q which is obtained from satisfying the two profit maximising conditions.