Step 4: Identify Region of Profits
A monopolist will seek to maximize his profits by producing quantity where MC=MR. Thus output quantity will be at Qm. The price of oil will correspond to the point on the demand curve at Qm. Thus price will be at P.
- Profits = Total cost - Total revenue
- Total Revenue= Price x Quantity
- Total cost= Average total cost (ATC) at Qm
Note that the price P lies above the Average Total Cost Curve. This means that the the monopolist, in our case, OPEC, is selling oil at a higher price than average, hence they are making an income.