Monopoly under differential cost conditions


If suppose a firm has two plants – one in Maharashtra and the other in Gujarat. How will the firm determine its output level and how will it decide the share of total output for each plant? This may involve two stages: If suppose a firm has two plants – one in Maharashtra and the other in Gujarat. How will the firm determine its output level and how will it decide the share of total output for each plant? This may involve two stages:

1. The output may be divided among two plants in such a way that the marginal costs of both the plants are equal. (Remember students, the marginal cost is the cost of producing additional unit). The firm tries to equalise the marginal cost of both the plants. This can be done by reallocating the production between two plants. For example, if the marginal cost of the Gujarat plant is less than the Mumbai plant, the firm should produce less in Mumbai and more in Gujarat

2. Profit will maximise at that level of output where the marginal cost is equal to marginal revenue. Even if the marginal cost of both the plants is equal, the profit will be maximised only at that point where both plants satisfy the condition of MC = MR. If the revenue earned from additional unit sold is higher than the cost of producing additional unit, the firm must still expand its output in both the plants to reach to highest profit level.